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Chiquita Brands International Inc – ‘10-Q’ for 9/30/07

On:  Friday, 11/9/07, at 4:37pm ET   ·   For:  9/30/07   ·   Accession #:  1193125-7-242545   ·   File #:  1-01550

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/09/07  Chiquita Brands International Inc 10-Q        9/30/07    5:505K                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    443K 
 2: EX-4.1      Amendment No. 3, Dated as of September 21, 2007,    HTML     14K 
                          to Warrant Agreement                                   
 3: EX-31.1     Section 302 CEO Certification                       HTML     11K 
 4: EX-31.2     Section 302 CFO Certification                       HTML     11K 
 5: EX-32       Section 906 CEO & CFO Certification                 HTML      9K 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2007

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨.    No  x.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 31, 2007, there were 42,573,853 shares of Common Stock outstanding.

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CHIQUITA BRANDS INTERNATIONAL, INC.

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PART I - Financial Information

Item 1 - Financial Statements

CHIQUITA BRANDS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share amounts)

See Notes to Condensed Consolidated Financial Statements.

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CHIQUITA BRANDS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share amounts)

See Notes to Condensed Consolidated Financial Statements.

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CHIQUITA BRANDS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)

(In thousands)

See Notes to Condensed Consolidated Financial Statements.

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CHIQUITA BRANDS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Interim results for Chiquita Brands International, Inc. (“CBII”) and subsidiaries (collectively, with CBII, the company) are subject to significant seasonal variations and are not necessarily indicative of the results of operations for a full fiscal year. Historically, the company’s results during the third and fourth quarters have been generally weaker than in the first half of the year due to increased availability of competing fruits and resulting lower banana 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 2006 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:

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. For the quarter and nine months ended September 30, 2007, the shares used to calculate diluted EPS would have been 43.2 million and 42.9 million, respectively, if the company had generated net income. For the quarter and nine months ended September 30, 2006, the shares used to calculate diluted EPS would have been 42.7 million and 42.6 million, respectively, if the company had generated net income.

Note 2 - Sale of Shipping Fleet

In June 2007, the company completed the sale of its twelve refrigerated cargo vessels and related spare parts for $227 million. The ships are being chartered back from an alliance formed by Eastwind Maritime Inc. and NYKCool AB. The parties also entered a long-term strategic agreement in which the alliance will serve as Chiquita’s preferred supplier in ocean shipping to and from Europe and North America.

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As part of the transaction, Chiquita is leasing back eleven of the vessels for a period of seven years, with options for up to an additional five years, and one vessel for a period of three years, with an option for up to an additional two years. The leases for all twelve vessels qualify as operating leases. The agreements also provide for the alliance to service the remainder of Chiquita’s core ocean shipping needs for North America and Europe, including, among other things, providing multi-year time charters commencing in late 2007 and early 2008 for seven additional refrigerated vessels.

The vessels sold consisted of eight specialized refrigerated ships and four refrigerated container ships, which collectively transported approximately 70 percent of Chiquita’s banana volume shipped to core markets in Europe and North America. At the date of the sale, the net book value of the assets sold was approximately $120 million, classified almost entirely in “Property, plant and equipment, net” in the Consolidated Balance Sheet. After approximately $3 million in transaction fees, the company realized a gain on the sale of the vessels of approximately $102 million, which has been deferred and will be amortized to the Consolidated Statements of Income over the initial leaseback periods (approximately $14 million per year). The company also recognized $4 million of expenses in the quarter ended June 30, 2007 for severance and write-off of deferred financing costs associated with the repayment of debt described below, and a $2 million gain on the sale of the related spare parts.

The cash proceeds from the transaction were used to repay approximately $210 million of debt, including immediate repayment of $90 million of debt associated with the ships, $24 million of Term Loan B debt, and $56 million of revolving credit borrowings, and repayment during the third quarter of $40 million of Term Loan C debt. The company expects to have invested the remaining $12 million of net proceeds into qualifying investments within 180 days after the close of the ship sale transaction, which proceeds the company would otherwise be obligated to use to repay amounts outstanding under its credit facility.

Note 3 - Commitments and Contingent Liabilities

As previously disclosed, on March 14, 2007, the company and the U.S. Justice Department entered into a plea agreement relating to payments made by the company’s former Colombian subsidiary to a group designated under U.S. law as a foreign terrorist organization. Under the terms of the agreement, the company pleaded guilty to one count of Engaging in Transactions with a Specially-Designated Global Terrorist Group and agreed to pay a fine of $25 million, payable in five equal annual installments with interest. On September 17, 2007, the United States District Court for the District of Columbia approved the plea agreement at the company’s sentencing hearing, and the company paid the first $5 million installment. Prior to the hearing, the Justice Department announced that it would not pursue charges against any current or former Chiquita executives. Pursuant to customary provisions in the plea agreement, the Court placed Chiquita on corporate probation for five years, during which time Chiquita must not violate the law and must implement and/or maintain certain business processes and compliance programs; violation of these requirements could result in setting aside the principal terms of the plea agreement. The company recorded a charge of $25 million in its financial statements for the quarter and year ended December 31, 2006 (included in “Commitments and contingent liabilities” in the Consolidated Balance Sheet at December 31, 2006). At September 30, 2007, $5 million of the liability is included in “Accrued liabilities” and $15 million is included in “Commitments and contingent liabilities” in the Condensed Consolidated Balance Sheet. During the quarter and nine months ended September 30, 2007, the company incurred legal fees of approximately $3 million and $9 million, respectively, in connection with this matter.

During the past several months, three lawsuits were filed against the company in U.S. federal court claiming that the company is liable for alleged tort violations committed in Colombia. The plaintiffs in all three lawsuits, either individually or as members of a putative class, claim to be family members or

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legal heirs of individuals allegedly killed by armed groups that received payments from the company’s former Colombian subsidiary. The plaintiffs claim that, as a result of such payments, the company should be held legally responsible for the deaths of plaintiffs’ family members. All three suits seek unspecified compensatory and punitive damages, as well as attorneys’ fees and costs; one suit also requests treble damages and disgorgement of profits, although it does not explain the basis of such demands. The company believes the plaintiffs’ claims are without merit and intends to defend itself vigorously against the lawsuits.

In October 2007, three shareholder derivative lawsuits were filed against certain of the company’s current and former officers and directors in U.S. federal and New Jersey state court. The complaints allege that the named defendants breached their fiduciary duties to the company and/or wasted corporate assets in connection with the payments that were the subject of the company’s March 14, 2007 plea agreement with the Justice Department, described above. The complaints seek unspecified damages against the named defendants; two of them also seek the imposition of certain equitable remedies on the company. None of the actions seek any monetary recovery from the company. The company is currently evaluating the complaints and any action which may be appropriate on the part of the company.

In October 2004 and May 2005, the company’s Italian subsidiary, Chiquita Italia, received separate notices from various customs authorities in Italy stating that it is potentially liable for an aggregate of approximately €26.9 million of additional duties and taxes on the import of certain bananas into the European Union (“EU”) from 1998 to 2000, plus interest currently estimated at approximately €16.2 million. The customs authorities claim that these amounts are due because the bananas were imported with licenses that were subsequently determined to have been forged. The company is contesting these claims through appropriate proceedings, principally on the basis of its good faith belief at the time the import licenses were obtained and used that they were valid. Chiquita Italia requested suspension of payment, pending appeal, of the approximately €13.8 million formally assessed thus far in these cases, primarily in Trento, Genoa and Alessandria, and intends to request suspension of payment of additional assessments as they are received. In October 2006, Chiquita Italia received notice in one proceeding, in a court of first instance in Trento, that the court had determined that it was jointly liable for a claim of €4.7 million plus interest accrued from November 2004. Chiquita Italia has appealed this finding; the applicable appeal involves a review of the entire factual record of the case as well as all of the legal arguments, including those presented during the appeals process, and the appellate court can render a decision on the case that disregards or substantially modifies the lower court’s opinion. Chiquita Italia issued a letter of credit to allow surety bonds to be posted in the amount of approximately €5 million (approximately $7 million), pending appeal. In March 2007, Chiquita Italia received notice in a separate proceeding that the court of first instance in Genoa had determined that it was not liable for a claim of €7.1 million plus interest. Should customs authorities choose to appeal this decision, Chiquita Italia would not be required to post any bonds or issue letters of credit to support its continuing defense of this claim. In August 2007, Chiquita Italia received notice that the court of first instance in Alessandria had determined that it was liable for a claim of €0.4 million plus interest. Chiquita Italia intends to appeal this finding and, as in the Trento proceeding, the appeal would involve a review of the entire factual record and legal arguments of the case; pending appeal, Chiquita Italia expects to post a surety bond for the amount claimed and may in the future be required to post additional surety bonds for up to the full amounts claimed in other proceedings.

In June 2005, Chiquita announced that its management had become aware that certain of its employees had shared pricing and volume information with competitors in Europe over many years in violation of European competition laws and company policies, and may have engaged in several instances of other conduct which did not comply with European competition laws or applicable company policies. The company promptly stopped the conduct and notified the European Commission (“EC”) and other regulatory authorities of these matters.

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In July 2007, the company received a Statement of Objections from the EC in relation to this matter. A Statement of Objections is a procedural document whereby the EC communicates its preliminary view in relation to a possible infringement of European Union competition laws and allows the companies identified in the document to present arguments in response. The company filed its response to the Statement of Objections with the EC in September 2007.

Based on the company’s voluntary notification and cooperation with the investigation, the EC notified Chiquita that it would be granted conditional immunity from any fines related to the conduct, subject to customary conditions, including the company’s continuing cooperation with the investigation and a continued determination of its eligibility for immunity. Accordingly, Chiquita does not expect to be subject to any fines by the EC. However, if at the conclusion of its investigation, which could continue until 2008 or later, the EC were to determine, among other things, that Chiquita did not continue to cooperate or was not otherwise eligible for immunity, then the company could be subject to fines, which, if imposed, could be substantial. The company does not believe that the reporting of these matters or the cessation of the conduct has had or should in the future have any material adverse effect on the regulatory or competitive environment in which it operates.

Other than the $20 million accrual at September 30, 2007 and the $25 million accrual at December 31, 2006 noted above for liability related to the plea agreement with the U.S. Justice Department, the Consolidated Balance Sheets do not reflect a liability for these contingencies for any of the periods presented.

Note 4 - Inventories

Note 5 - Goodwill

During the 2006 third quarter, due to a decline in Atlanta AG’s business performance in the period following the implementation of the new EU banana import regime as of January 1, 2006, the company accelerated its testing of the Atlanta AG goodwill, which had a carrying value of $43 million. As a result of this analysis, the company recorded a goodwill impairment charge for the full amount in the quarter ended September 30, 2006, $29 million of which was included in the Other Produce segment and $14 million in the Banana segment.

The impairment review is highly judgmental and involves the use of significant estimates and assumptions, which have a significant impact on the amount of any impairment charge recorded. Estimates of fair value are primarily determined using discounted cash flow methods and are dependent upon assumptions of future sales trends, market conditions and cash flow over several years. Actual cash flow in the future may differ significantly from those assumed. Other significant assumptions include growth rates and the discount rate applicable to future cash flow.

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Note 6 - Debt

Long-term debt consists of the following:

The company and Chiquita Brands L.L.C. (“CBL”), the main operating subsidiary of the company, have a senior secured credit facility with a syndicate of bank lenders (the “CBL Facility”) originally comprised of two term loans (the “Term Loan B” and the “Term Loan C”) (collectively, the “Term Loans”) and a revolving credit facility (the “Revolving Credit Facility”). In June 2006, in connection with an amendment to modify certain financial covenants, the Revolving Credit Facility was increased by $50 million to $200 million. In October 2006, the company was required to obtain a temporary waiver, for the period ended September 30, 2006, from compliance with certain financial covenants in the CBL Facility, with which the company otherwise would not have been in compliance. In November 2006, the company obtained a permanent amendment to the CBL Facility to cure the covenant violations that would have otherwise occurred when the temporary waiver expired. The amendment revised certain covenant calculations relating to financial ratios for leverage and fixed charge coverage, established new levels for compliance with those covenants to provide additional financial flexibility, and established new interest rates. Total fees of approximately $2 million were paid to amend the CBL Facility in November 2006. In March 2007, the company obtained further prospective covenant relief with respect to the financial sanction contained in the plea agreement with the Justice Department and other related costs. See Note 3 to the Condensed Consolidated Financial Statements for further information on the plea agreement.

At September 30, 2007, no borrowings were outstanding under the Revolving Credit Facility and $29 million of credit availability was used to support issued letters of credit, leaving $171 million of credit available under the Revolving Credit Facility. The company repaid $80 million of borrowings under the Revolving Credit Facility in the 2007 second quarter, mostly through ship sale proceeds. In connection with the ship sale, the company also repaid $90 million of debt secured by the ships and $24 million of remaining Term Loan B debt. During the third quarter 2007, the company repaid $40 million of Term Loan C, also from proceeds from the sale of the vessels. The company has recognized $2 million of charges to interest expense in 2007 for the write-off of related deferred debt issue costs.

As more fully described in Note 3 to the Condensed Consolidated Financial Statements, the company may be required to issue letters of credit of up to approximately $40 million in connection with its appeal of certain claims of Italian customs authorities. The company issued a letter of credit in the fourth quarter 2006 to allow surety bonds to be posted in the amount of approximately €5 million (approximately $7

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million), and in the next year may be required to issue letters of credit in amounts up to approximately $3 million as security in connection with its appeal of other Italian customs cases. Any future letters of credit, if required, would be issued under the company’s Revolving Credit Facility, which contains a $100 million sublimit for letters of credit.

The Revolving Credit Facility bears interest at LIBOR plus a margin of 1.25% to 3.00%, and CBL is required to pay a fee on the daily unused portion of the Revolving Credit Facility of 0.25% to 0.50% per annum, depending in each case on the company’s consolidated leverage ratio. At September 30, 2007, the interest rate on the Revolving Credit Facility was LIBOR plus 3.00%.

The Term Loans cannot be re-borrowed and require quarterly payments, which began in September 2005, amounting to 1% per year of the initial principal amount less any prepayments, for the first six years, with the remaining balance to be paid quarterly in the seventh year. As described above, Term Loan B was repaid in full in June 2007. At September 30, 2007, $327 million was outstanding under Term Loan C. Term Loan C bears interest at LIBOR plus a margin of 2.00% to 3.00%, depending on the company’s consolidated leverage ratio. At September 30, 2007, the interest rate on Term Loan C was LIBOR plus 3.00%.

The company’s borrowing capacity and its less-restrictive Senior Notes may be impacted by any failure to comply with the financial covenants in the CBL Facility. The company remains in compliance with these covenants, and expects to remain in compliance even though the covenants become more restrictive beginning in the quarter ended December 31, 2007. However, as a result of recent operating performance, the company has less covenant cushion than it had expected when it amended the covenant levels under the CBL Facility in November 2006. If the company does not achieve improvements in year-over-year operating performance sufficient to remain in compliance, it would be required to seek further covenant relief or to replace or modify the CBL Facility. Similar relief may be required if unanticipated events occur that have a material negative earnings impact on the company. In addition, in such events, the company could become further limited in its ability to fund discretionary market or brand-support activities, innovation spending, capital investments and/or acquisitions that had been planned as part of the execution of its long-term growth strategy. Although no assurance can be provided in this regard, the company has determined that it has sufficient covenant cushion at present, and although it has examined options to do so, it has no immediate plans to replace or modify the CBL Facility.

Under the amended CBL Facility, CBL may distribute cash to CBII for routine CBII operating expenses, interest payments on CBII’s 7 ¹/2% and 8 ⁷/8% Senior Notes and payment of certain other specified CBII liabilities. Until Chiquita meets certain financial ratios and elects to become subject to a reduced maximum CBL leverage ratio, (i) CBL’s distributions to CBII for other purposes, such as dividend payments to Chiquita shareholders and repurchases of CBII’s common stock, warrants and senior notes, are prohibited, and (ii) the ability of CBL and its subsidiaries to incur debt, dispose of assets, carry out mergers and acquisitions, and make capital expenditures is more limited than under the original CBL Facility.

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Note 7 - Segment Information

Beginning in 2007, the company modified its reportable business segments to better align with the company’s internal management reporting procedures and practices of other consumer food companies. The company now reports three business segments: Bananas, Salads and Healthy Snacks, and Other Produce. The Banana segment, which is essentially unchanged, includes the sourcing (purchase and production), transportation, marketing and distribution of bananas. The Salads and Healthy Snacks segment (formerly the Fresh Cut segment) includes value-added salads, fresh vegetable and fruit ingredients used in foodservice, fresh-cut fruit operations, as well as processed fruit ingredient products which were previously disclosed in “Other.” The Other Produce segment (formerly the Fresh Select segment) includes the sourcing, marketing and distribution of whole fresh fruits and vegetables other than bananas. In addition, to provide more transparency to the operating results of each segment, the company no longer allocates certain corporate expenses to the reportable segments. These expenses are included in “Corporate” below. Prior period figures have been reclassified to reflect these changes. The company evaluates the performance of its business segments based on operating income. Intercompany transactions between segments are eliminated.

Financial information for each segment follows:

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Note 8 - Shareholders’ Equity

See Note 13 to the Condensed Consolidated Financial Statements for a description of the company’s adoption of FSP AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” and its impact on retained earnings.

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Note 8 - Shareholders’ Equity (continued)