UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-K
| ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2013 |
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from to |
Commission File Number 1-1550
__________________________________________
Chiquita Brands International, Inc.
(Exact name of registrant as specified in its charter)
| New Jersey | 04-1923360 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 550 South Caldwell Street, Charlotte, North Carolina | 28202 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number including area code : (980) 636-5000
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange On Which Registered | |
| Common Stock, par value $.01 per share | New York | |
Securities registered pursuant to Section 12(g) of the Act :
None
__________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ý | |||
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of Common Stock held by non-affiliates at June 30, 2013, the last business day of the registrant's most recently completed second quarter, was approximately $502 million.
As of February 24, 2014, 46,832,709 shares of Common Stock were outstanding.
__________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Chiquita Brands International, Inc. 2013 Annual Report to Shareholders are incorporated by reference in Parts I and II. Portions of the Proxy Statement for the 2014 Annual Meeting of Shareholders are incorporated by reference in Part III.
CHIQUITA BRANDS INTERNATIONAL, INC.
TABLE OF CONTENTS
| Page | ||
| Item 1 | ||
| Item 1A | ||
| Item 1B | ||
| Item 2 | ||
| Item 3 | ||
| Item 4 | Mine Safety Disclosures | |
| Item 5 | ||
| Item 6 | ||
| Item 7 | ||
| Item 7A | ||
| Item 8 | ||
| Item 9 | ||
| Item 9A | ||
| Item 9B | ||
| Item 10 | ||
| Item 11 | ||
| Item 12 | ||
| Item 13 | ||
| Item 14 | ||
| Item 15 | ||
This Annual Report on Form 10-K contains certain statements that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of Chiquita, including: the customary risks experienced by global food companies, such as prices for commodity and other inputs, currency exchange rate fluctuations, industry and competitive conditions (all of which may be more unpredictable in light of continuing uncertainty in the global economic environment), government regulations, food safety issues and product recalls affecting the company or the industry, labor relations, taxes, political instability and terrorism; challenges in implementing the relocation of its corporate headquarters and other North American corporate functions to Charlotte, North Carolina; challenges in implementing restructuring and leadership changes announced in August and October 2012 including its ability to maintain the cost savings and other benefits from the restructuring; unusual weather events, conditions or crop risks; continued ability to access the capital and credit markets on commercially reasonable terms and comply with the terms of its debt instruments; access to and cost of financing; and the outcome of pending litigation and governmental investigations involving the company, as well as the legal fees and other costs incurred in connection with such items.
The forward-looking statements speak as of the date made and are not guarantees of future performance. Actual results or developments may differ materially from the expectations expressed or implied in the forward-looking statements, and the company undertakes no obligation to update any such statements.
PART I
| ITEM 1. | BUSINESS |
General
Chiquita Brands International, Inc. ("CBII") and its subsidiaries (collectively, "Chiquita," we, us or the company) operate as a leading international marketer and distributor of (1) bananas and pineapples sold under the Chiquita® and other brand names in nearly 70 countries and (2) packaged salads sold under the Fresh Express® and other brand names primarily in the United States. We produce approximately one-third of the bananas we market on farms we own and lease, and purchase the remainder of the bananas and all of the lettuce, pineapples and other fresh produce from third-party suppliers throughout the world. No individual customer accounted for more than 10% of net sales during any of the last three years. CBII was originally formed as a New Jersey corporation in 1899 under the name United Fruit Company.
Business Segments
Chiquita reports the following three business segments:
| • | Bananas: Includes the sourcing (purchase and production), transportation, marketing and distribution of bananas. |
| • | Salads and Healthy Snacks: Includes ready-to-eat, packaged salads, referred to in the industry as "value-added salads"; other value-added products, such as healthy snacking items, fresh vegetable and fruit ingredients used in foodservice, processed fruit ingredients; and until March 2013, our equity-method investment Danone Chiquita Fruits, which sold Chiquita-branded fruit smoothies in Europe (see Note 7 to the Consolidated Financial Statements in Exhibit 13). |
| • | Other Produce: Includes the sourcing, marketing and distribution of whole fresh produce other than bananas. As part of the 2012 restructuring plan, we exited our North American deciduous business at the end of the California grape season in December 2012. Beginning in 2013, the primary product of the Other Produce segment is pineapples. |
For further information on factors affecting our results of operations, including results by business segment, liquidity and financial condition, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 18 to the Consolidated Financial Statements, both included in Exhibit 13, and "Item 1A - Risk Factors."
BANANA SEGMENT
We source, distribute and market bananas that are sold principally under the "Chiquita" brand name. Banana segment net sales were $2.0 billion, $2.0 billion and $2.0 billion in 2013, 2012 and 2011, respectively. Banana sales amounted to 64% of our consolidated net sales in 2013, 2012 and 2011. Banana sales in European, Mediterranean and Middle Eastern markets were 52%, 55% and 55% of the segment sales in 2013, 2012 and 2011, respectively. Middle Eastern and Mediterranean markets include Iran and occasionally Syria, where we sell bananas under license from the U.S. government despite its trade sanctions because they are food products. The majority of the remaining sales in the banana segment are in North America. We receive royalties from the use of the Chiquita brand under a trademark licensing agreement with a third-party for banana sales in Japan and Korea.
Competition
Bananas are distributed and marketed internationally in a highly competitive environment. Our primary competitors include a limited number of multi-national banana importers and exporters, principally Dole Food Company, Inc., Fresh Del Monte Produce, Inc. and Fyffes plc. In addition, the vertical integration and direct-sourcing activities of large retailers, as well as a wide range of smaller banana export companies, including growers' cooperatives, are significant competitive factors. To compete successfully, we must be able to source bananas of uniformly high quality at a competitive cost, maintain strong customer relationships, quickly and reliably transport and distribute products to worldwide markets and maintain our brand.
Markets, Customers and Distribution
Our principal markets are North America and Europe. In Europe, we are the brand leader and obtain a price premium for Chiquita bananas. In North America, we maintained the No. 2 market position in bananas, hold the number one market share in U.S. supermarkets and import more than one-fourth of the bananas in the market. Our Core Europe market consists of the 28 member states of the European Union ("EU"), Switzerland, Norway and Iceland. We also ship bananas regularly to various non-EU countries accessed through the Mediterranean that offer a growth opportunity due to increasing consumption and consumer purchasing power. When selling in these Mediterranean countries, we may vary the port of discharge and sale based on prevailing
1
market conditions. Our other international markets are primarily in Russia and the Middle East, including Iran and occasionally Syria. Sales in the Mediterranean, Russian and Middle Eastern markets are primarily invoiced in U.S. dollars.
We have regional sales organizations to service major retail customers and wholesalers. In some cases, these sales organizations provide services for all of our products, not just bananas, as well as customer support, including assistance with transportation and logistics, ripening, and category management for bananas and other produce. In both Europe and North America, we sell "green" (unripened) bananas and "yellow" (ripened) bananas. Many customers have their own facilities to ripen green bananas purchased from Chiquita or other sources; in some cases, we provide technical advice or operate the customers' ripening facilities. We also provide retail marketing support services for our customers. These ripening, advisory and support services help us develop and strengthen long-term supply relationships with our customers.
In North America, we most often sell bananas and related services under one-year contracts to national and regional grocery retailers. These contracts typically have fixed per-box base prices, and also include variable surcharges based on fuel indices that are intended to recover changes in transportation and other fuel-based costs. In 2014, our surcharges in North America were expanded to also recover increases in the cost of paper. An advantage of these contracts is that they stabilize pricing to us throughout the year and reduce our exposure to volatile spot market prices. A disadvantage is that we may not always be able to pass on unexpected cost increases when they arise or may not be able to take advantage of short-term, market-driven price increases due to short supply or other factors. Approximately 90% of the volume sold in North America is sold under these contracts; the remainder is on the spot market.
In Europe and the Mediterranean, our customers are also large grocery retailers, ripeners and wholesalers. These customers typically seek annual or multi-year arrangements with pricing that is flexible, depending on market conditions. Bananas and other produce are typically sold on the basis of weekly price quotes, which fluctuate significantly due to supply conditions, seasonal trends of consumer demand, transportation costs, currency exchange rates, competitive dynamics and other factors. Some customers in Europe have begun to purchase bananas under fixed-price-per-box contracts and few of these contracts have pricing in U.S. dollars. Banana sales in the Middle East are generally under fixed-price per box contracts in U.S. dollars. In both Europe and the Middle East, these contracts often include pricing that is higher in the first half of the year and lower in the second half to correspond with the seasonal supply-and-demand dynamics.
Pricing
Banana pricing depends on several factors, including the availability of bananas relative to consumer demand and the availability, price and quality of competing fresh fruit items. Banana pricing (in our purchases and in our sales other than in fixed-price-per-box contracts) is subject to seasonal variations because demand is higher in the first half of the year as local produce that competes with bananas largely comes to market in the summer and fall. As a consequence, banana prices and our Banana segment results are typically stronger during the first half of the year. We generally obtain a premium price for bananas sold in Europe, where many stores offer two quality levels of bananas, and we believe this price premium is due to the strength of the "Chiquita" brand and our reputation for consistent product quality, leadership in consumer marketing and category management and innovative ripening techniques.
Sourcing
Bananas grow in tropical climates where the temperature generally does not fall below 50 degrees Fahrenheit. Under normal circumstances, banana plants can produce fruit for harvest approximately every seven months. After harvest, bananas are washed and, in most cases, cut into clusters and packed into 40-pound boxes. The boxes of bananas are placed on pallets and loaded into containers for shipment. The production of bananas is vulnerable to (1) adverse weather conditions, including windstorms, floods, drought and temperature extremes, (2) natural disasters, such as earthquakes and hurricanes, (3) crop disease, such as the black sigatoka leaf fungus (4) pests, and (5) other factors. If banana plants are destroyed, new plantings will bear fruit for harvest in approximately nine months. If grown under stressed conditions, banana production may be lower in both quantity and quality.
During 2013, approximately 26%, 24%, 13%, 11% and 10% of all bananas we sold were sourced from Guatemala, Costa Rica, Ecuador, Honduras and Panama, respectively. We also source bananas from Mexico, the Philippines, Colombia and Nicaragua. In 2013, approximately one-third of our bananas were produced by subsidiaries on owned farms and the remainder was purchased from independent growers under short- and long-term fruit supply contracts, under which we take title to the fruit either at packing stations, once loaded aboard ships or at the port of destination. Although we maintain broad geographic diversification for purchased bananas, we have a significant reliance upon long-term relationships with certain large growers. In 2013, our three largest independent growers, which operate in Mexico and Costa Rica provided approximately 21% of our total purchased volume.
We evaluate our banana sourcing decisions periodically, including both the sourcing countries and whether we should purchase or grow bananas. Considerations in this evaluation include local currency, tax rules, regulatory environment, political and economic stability, labor practices, exit prices, potential synergies and other factors. Because of the start-up time and capital necessary to build additional farms, increasing the production on farms we own cannot be done quickly. Purchasing bananas allows us to reduce our financial and operating risks and avoid the substantial capital required to maintain and finance additional
2
banana farms; it also permits us to avoid large expenditures in the event of major damage to farms resulting from weather, floods, disease or earthquakes. However, producing our own bananas permits us to more closely control the agricultural practices, which we believe contribute to the quality of the fruit and, potentially, the productivity of the farm. Typically, banana purchase agreements have one- or two-year terms, but may have longer terms. However, some of these contracts with terms longer than one year allow for applicable prices to be renegotiated annually or every other year, and if new purchase prices cannot be agreed upon, the contracts will terminate. The long-term purchase agreements typically include provisions relating to agricultural practices, packing and fruit handling, environmental practices, food safety, social responsibility standards, penalties payable by us if we do not take delivery of contracted fruit, penalties payable by the grower for shortages to contracted volumes and other provisions common to contracts for the international sale of goods. Under some fruit supply arrangements, we provide the growers with technical assistance related to production and packing of bananas for shipment. We believe that our agricultural practices contribute to the quality of our bananas, and we specify many of the requirements for our contract growers, though we believe these practices can be better applied when we control the farming operations. From time to time, we identify opportunities to control additional acreage for banana production, either through land purchases, lease or through strategic partnerships. In February 2014, we purchased approximately 1,700 acres of banana farms in Honduras, which we can manage with our existing overhead and logistics resources because they are contiguous to our existing farms. When banana supply is disrupted, we may have to source bananas on a "spot" basis from growers who have available fruit. In these circumstances, we may have to pay higher market prices and are not able to ensure that our recommended agricultural practices have been followed.
Labor costs in Latin America for our owned production of bananas represented only 5% of our total banana segment operating costs in 2013. Labor costs vary with the country of origin. To a lesser extent, fertilizer costs and paper costs for the production and packaging of bananas are also important.
Logistics
Due to their highly perishable nature, bananas must be brought to market and sold generally within 30 to 40 days after harvest. This requires efficient logistics processes for loading, unloading, transporting and delivering fruit from the farm to the outbound port, from the source country to the market country, and from the inbound port to the customer. To transport and distribute our bananas internationally, we (1) charter refrigerated cargo ships that are highly specialized, in both size and technology, for international trade in bananas and other refrigerated products and (2) contract with common carriers to transport our refrigerated banana container equipment on-board their ships along trade routes similar to our own. We also transport third-party cargo on return trips, primarily from North America and Europe to Latin America, to reduce ocean transportation costs. For more information on our core ocean shipping needs, see "Item 2 - Properties."
Bananas are harvested while still green and are subsequently ripened. To control quality, bananas are ripened under controlled conditions. We have a proprietary Low-Temperature Ripening process, a technique that enables bananas to begin the ripening process in shipping containers during transit, and thereby reduce the amount of inland ripening capacity required. We also operate pressurized ripening rooms in Europe and North America to complete the ripening process and may assist our customers who operate their own pressurized ripening rooms. We believe our service provides value to customers through improved fruit quality, longer shelf-life, lower inventory levels and lower required investment.
The price of bunker fuel used in shipping operations is an important variable component of transportation costs. Bunker fuel prices are volatile. We manage this volatility with bunker fuel forward contracts to lock in prices of up to three-fourths of our core European usage for up to three years. However, these hedging strategies do not fully protect us against continually rising fuel prices, and they can result in losses when market prices for bunker fuel decline, although we expect that any losses on our forward contracts from declines in market prices would be less than the decline in cost of bunker fuel purchases. See further discussion of our hedging activities in the "Market Risk Management – Financial Instruments" section of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 1 and 11 to the Consolidated Financial Statements in Exhibit 13.
From time to time, we have experienced shipping interruptions for reasons such as mechanical breakdown or damage to a ship, strikes at ports and port damage due to weather (e.g., hurricanes or tropical storms). Although we believe we carry adequate insurance and attempt to transport products by alternative means in the event of an interruption, an extended interruption could have a significant adverse effect on us.
We operate loading and unloading facilities that we own or lease in Central, South and North America and enter into third-party contract arrangements for port services at various ports of destination in Europe. Most of these ports serve relatively large geographic regions for production or distribution. If a port becomes unavailable, we must access alternate port facilities and reconfigure our distribution network, which can increase costs. We use common carriers to transport bananas overland to ports in Central and South America and from the ports of destination to the customers. Generally, title to the bananas passes to the customer upon delivery, which is either at the port of arrival in North America or Europe or at the customer's inland facilities. In certain Latin American locations, we operate port facilities for all cargo entering or leaving the port, not just for our own products.
3
Most of our tropical banana shipments into North America and Core Europe are delivered using containers and pallets. To the extent possible, once the bananas are loaded into containers, they remain in the same containers for transportation from the port of loading through ocean transport, port of arrival, discharge and delivery to customers. This minimizes damage to the bananas by eliminating the need to handle individual boxes or pallets and makes it easier to maintain the bananas at a constant temperature.
SALADS AND HEALTHY SNACKS SEGMENT
The Salads and Healthy Snacks segment includes packaged, ready-to-eat salads in the retail market, commonly referred to as "value-added salads," sold under the Fresh Express and private labels, fresh vegetable and fruit ingredients used in foodservice, healthy snacks, processed fruit ingredient products and whole-head lettuce products. Net sales of the Salads and Healthy Snacks segment were approximately $967 million, $953 million and $953 million for the years ended December 31, 2013, 2012 and 2011, respectively.
We believe Fresh Express is a leader in freshness-extending, controlled and modified atmosphere packaging systems for value-added salads. We distribute approximately 250 different retail value-added salad products nationwide to food retailers and approximately 30 value-added healthy snacking products. We also distribute approximately 60 fresh produce foodservice offerings, primarily to third-party distributors for resale mainly to quick-service restaurants located throughout the U.S. Fresh Express holds the No. 1 market share position of branded retail value-added salads in the U.S based on Information Resources Inc. ("IRI") data. Based upon consumption patterns, volume and profitability are typically higher during the first and second quarters of the year.
Fresh Express' retail value-added salad sales represented approximately 29%, 20% and 20% of consolidated "Net sales" in each of 2013, 2012 and 2011, respectively. Significant retail value-added salad product lines that represented 10% or more of retail sales include Blends (romaine and other fancier lettuce-based salads), Tender Leaf Blends (spring mix and baby spinach blends) and Complete Salads (salads that contain toppings and dressings).
Competition
Fresh Express competes with a variety of other nationally branded and private label value-added salad offerings. Competitors include Dole Food Company, Earthbound Farms, Ready Pac and Taylor Farms, who also produce value-added salads under retail grocers' private labels. The market share under private labels has grown significantly during the past few years. While we had traditionally been focused on branded product offerings, we expanded our product offerings in 2012 to include private label, and based on contracts awarded in late 2012, we began supplying private label retail value-added salads to certain key customers in 2013. There are many other food and produce sellers who participate in the value-added produce and snacking markets.
Markets, Customers and Distribution
Our retail value-added salad products are sold under the Fresh Express brand and other labels to several of the nation's top retailers and to a diverse base of customers throughout the United States, most of whom purchase under annual and multi-year, fixed-price per case contracts that include surcharges based on fuel indices intended to recover fuel-based costs. An advantage of these contracts is that they stabilize demand and pricing throughout the year. A disadvantage is that the company may not be able to pass on unexpected cost increases when they arise or may not be able to take advantage of short-term, market-driven price increases.
Value-added salads sold to grocery retailers are supported by a sales and marketing organization that includes sales managers who are responsible for retail grocery accounts within their geographic regions and who often work with a network of brokers across the country to sell products, gain business with new retail accounts and introduce new products to existing retail accounts. In some cases, this same sales network also handles sales of bananas and other products sold by Chiquita.
We also sell fresh-cut produce, such as lettuce, tomatoes, spinach, cabbage and onions, to foodservice distributors who resell these products to foodservice operators, primarily quick service restaurants. Approximately one-fifth of the Salads and Healthy Snacks segment net sales have been to foodservice customers. Foodservice customers mainly purchase shredded or whole-head lettuce; however, we have also introduced higher-margin products into this market, such as premium tender leaf salads. We market to foodservice customers by focusing on large, strategic accounts that provide reliable business at reasonable margins, under contracts that typically allow for the pass-through of raw product and other cost increases on a weekly basis. Customer sales representatives and account managers service these foodservice customers. One foodservice customer represented nearly 14% of sales in the Salads and Healthy Snacks segment in 2013. No other customer accounted for more than 10% of segment sales.
Sourcing
We source the majority of our raw products, primarily lettuce and apples, for the Salads and Healthy Snacks segment from third-party growers, primarily located in California, Arizona and Mexico, but also in Chile, Florida, Michigan, New York, Georgia, Texas, Washington, Ohio and Colorado. For lettuce, we often enter into contracts with these growers to help mitigate supply risk and manage exposure to cost fluctuations. We work with the growers and harvesters to develop safe, innovative, quality-enhancing
4
and cost-effective production and harvesting techniques, including techniques to reduce water and agrichemical usage. The geographic diversity of our suppliers helps us to lessen the effects of any event that could cause production declines in a single region. The production of lettuce crops is vulnerable to pests, disease and adverse weather conditions, such as floods, drought and temperature extremes. In the event lettuce crops are severely damaged, the next harvest on the same acreage would be delayed 45 to 120 days, depending on the product and the time of year.
Logistics
Lettuce and leafy greens are extremely sensitive to temperature and humidity. Once harvested, the produce is promptly cooled and shipped in temperature-controlled trucks to our regional processing and distribution facilities, where it is inspected, processed, packaged and boxed for shipment. Orders for value-added salads and other fresh-cut produce are shipped quickly after processing, primarily to customer distribution centers or third-party distributors for further redistribution. Deliveries are made in temperature-controlled trucks. We contract for all trucking services with third parties. Our distribution network allows for nationwide daily delivery capability and provides consistently fresh products to customers. We believe more frequent deliveries allow our retail customers to better manage their inventory and reduce product spoilage, which helps increase their margins. For certain customers, we also provide inventory management services, where we monitor inventory levels at each of their locations and make deliveries to maximize freshness and minimize shrink (losses on unsold inventory).
Healthy Snacks
We sell healthy snacks primarily in North America. Healthy snacking products include Chiquita Fruit Bites, which are single-serve fruit snacks sold in convenience and retail stores under the Chiquita brand name and also in foodservice outlets and quick-service restaurants. The healthy snacks business primarily involves purchasing, processing, packaging and distributing fresh-cut apples in convenient, Chiquita-branded and unbranded packaging. We source fruit seasonally from North and South America. We cut, package and seal the fruit in our facilities in Illinois, Georgia and California. Our primary competitors are Crunch Pak, C.H. Robinson Worldwide, Tree Top Inc., Reichel Foods, Inc. and other regional producers of branded and private label fresh-cut fruit selections. For our Chinese market, fruit and vegetables are also sourced from China and the healthy snacks are cut, packaged and sealed in a facility in China.
We also sell banana puree and other processed fruit ingredients to food manufacturers and quick service restaurants from processing facilities in Costa Rica with fruit sourced primarily from Costa Rica. Fruit ingredients typically have a longer shelf life than whole, fresh fruit and are distributed from both the processing facilities and from refrigerated warehouses in the U.S. and the Netherlands. Our primary competitors are smaller companies in Latin America that supply unbranded banana puree.
In May 2010, we sold 51% of our European smoothie business to Danone S.A., and formed a joint venture ("Danone JV") intended to develop, manufacture and sell Chiquita-branded, packaged fruit juices and fruit smoothies in Europe. The smoothies are a blend of banana puree, fruit juice and other fresh fruit. In March 2013, the Danone JV sold its operations to a third party who continues to produce Chiquita-branded smoothies under license. In October 2013, we sold all of our shares in the Danone JV to our former JV partner, Danone S.A. The joint venture was accounted for using the equity method in the Salads and Healthy Snacks segment. See further information in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operations - Salads and Healthy Snacks Segment" and Note 7 to the Consolidated Financial Statements, both included in Exhibit 13.
In June 2013, we divested a business that sold locally-sourced, fresh-cut fruit in Europe from its facilities in the Netherlands. The new owners of this business continue to produce Chiquita-branded products under license.
OTHER PRODUCE SEGMENT
We distribute and market whole, fresh produce other than bananas in Europe and North America and license the use of the Chiquita brand to a third-party for pineapples sold in Japan and Korea. Late in 2012, we announced a restructuring and a new strategy to focus on our core businesses of bananas and salads. Beginning in 2013, pineapples are the primary product in the Other Produce segment because they are sourced from the same regions and can utilize the same logistical infrastructure as bananas. We seek to opportunistically sell pineapples and other produce items where profitable or where they can effectively absorb fixed costs of the value chain of our core bananas and salads businesses. In 2011 and 2012, the major items sold also included grapes and avocados. Net sales of the Other Produce segment were approximately $121 million, $140 million and $163 million in 2013, 2012 and 2011, respectively.
Markets, Customers and Distribution
Our Other Produce operations in North America and Europe primarily market Chiquita-branded produce items. A significant number of our retail customers are large organizations with multiple stores, who have significant buying leverage. In North America, produce may be sold under fixed-price-per-box contracts, on a commission basis or in spot markets. The European operations are conducted throughout Western and Southern Europe where customers typically do not enter into contracts, but
5
purchase fruit at market prices that change weekly. Our primary competitors are other wholesalers and distributors of fresh produce, which may be local, national or international, including Fresh Del Monte Produce, Inc. and Dole Food Company, Inc.
Sourcing and Logistics
Beginning in 2013, pineapples, sourced primarily from Costa Rica, are purchased under annual or multi-year contracts from third party growers in the same regions were we produce and purchase bananas. Shipment of pineapples helps to reduce any excess ocean shipping capacity from our banana business because they are sourced in the same regions. Common carriers are used for inland transportation.
In some cases, we provide growers of non-banana produce advances during the growing season or as the fruit is shipped to us. Advances are generally repaid when the produce is harvested and sold and are generally short-term in nature. We require property liens and pledges of the season's produce as collateral to support any advances. See further discussion of our seasonal grower advances in Notes 1 and 4 to the Consolidated Financial Statements, included in Exhibit 13. We are not heavily dependent on any single grower for Other Produce products.
Intellectual Property
The Chiquita brand is recognized in North America and many parts of Europe and Asia. The Chiquita® trademark is owned by our main operating subsidiary, Chiquita Brands L.L.C. ("CBL"), and is registered in approximately 100 countries. We also own hundreds of other trademarks, registered throughout the world, used on our second-quality bananas and on a wide variety of other fresh and prepared food products. The Fresh Express® trademark is registered in the U.S., Canada and several countries in Europe and the Far East. Fresh Express also owns registrations for a variety of other trademarks used in our value-added salads business. Substantially all of our intellectual property is pledged as collateral under our 7.875% Notes and ABL facility.
Since 2009, we have licensed the use of the Chiquita brand name to a third party for the sale of whole, fresh bananas and pineapples in Japan and Korea. We also license our trademarks to other companies for use in prepared processed food products, such as fruit smoothies, baby and toddler food, fruit juices and banana bread mix.
Chiquita and its affiliates have patents covering a number of proprietary technologies, including the ripening of bananas and other produce and the processing of food products. In addition, Fresh Express and its affiliates have patents pending and granted covering a number of proprietary technologies, including methods of harvesting, treating and maintaining produce products and patents related to packaging design. Granted patents expire at various times from 2014 through 2029. In the food preparation field, where patents generally provide protection for up to 20 years, new technology typically develops before existing patents and proprietary rights expire. Chiquita and Fresh Express also rely heavily on certain proprietary machinery and processes that are used to manufacture and package some of its products.
Health, Environmental and Social Responsibility
Chiquita's worldwide operations and products are subject to inspections by environmental, food safety, health and customs authorities and numerous governmental regulations, including those relating to the use and disposal of agrichemicals, the documentation of food shipments and the traceability of food products. We believe we are substantially in compliance with applicable regulations.
Since the early 1990s, we have implemented programs to significantly improve our environmental performance related to banana production. We have undertaken a considerable effort to achieve certification under the standards of the Rainforest Alliance, an independent non-governmental organization. This certification program for banana producers is aimed at improving and managing environmental impacts and improving conditions for workers. All of our owned banana farms in Latin America have been certified under this program since 2000. We also encourage and work with our third-party suppliers to achieve compliance with these standards. Certification requires that farms meet pre-defined performance criteria as judged by annual audits conducted by the Sustainable Agriculture Network, a coalition of third-party environmental groups coordinated by the Rainforest Alliance.
Similarly, since 2004, all owned banana farms in Latin America have achieved certification to the Social Accountability 8000 labor standard, which is based on the core International Labor Organization conventions. We were the first major agricultural operator to earn this certification in each of the Latin American countries where we have owned farms (Costa Rica, Panama, Honduras and Guatemala). In addition, as of November 2005, all of our owned banana farms had achieved certification to GlobalGAP, an international food safety standard, and we have maintained those certifications to present.
Chiquita’s experience with Rainforest Alliance certification has led to the formation of various biodiversity partnerships in Costa Rica and Panama, with local communities, governmental agencies and retail customers. One such project, the Nogal
6
Community Project aims to protect and connect rainforest areas in Northeastern Costa Rica, with the San San Pond Sak wetlands in the Bocas province of Panama and conserves valuable wetlands and endangered species.
Fresh Express also maintains extremely high standards in the area of food safety and quality. Our food safety requirements also apply to our third-party growers, suppliers and processors. The Fresh Express food safety practices for leafy greens include, but are not limited to: (1) multi-point monitoring from field to shelf; (2) pre-approval and monitoring of the fields where Fresh Express leafy green products are grown, including monitoring water quality and soil amendments as well as ensuring an appropriate distance is maintained from potential contamination risks such as livestock and composting operations; and (3) utilizing our own expert auditors to assess growing, harvesting and cooling operations. In recognition of our commitment to food safety and quality, Fresh Express won the coveted “Black Pearl” award from the International Association of Food Protection. Consumers can also trace select varieties of Fresh Express salad to the region(s) where they were harvested, simply by entering the Leaf Locator code on the bag at www.freshexpress.com/YourSaladStory.
Additionally, all of our Fresh Express manufacturing facilities have achieved Food Safety Systems Certification (FSSC). This certification is obtained through a rigorous audit process conducted by a third party against a globally and Global Food Safety Initiative (GFSI) recognized food safety management system standard.
As part of our sustainability program to reduce environmental impact and ultimately contribute to a world capable of sustaining future generations, Chiquita announced in 2013 that it had established sustainability targets for 2020 to reduce the usage of fresh water in its operations by 15% and greenhouse gas emissions by 30% from a 2007 baseline.
Employees
As of December 31, 2013, we had approximately 20,000 employees, approximately 16,000 of whom work in Latin America. Approximately 14,000 of the employees working in Latin America are covered by labor contracts. Latin American labor contracts covering approximately 7,000 employees are currently being negotiated, and contracts covering approximately 1,000 employees are set to expire in 2014. Under applicable law, employees are required to continue working under the terms of the expired contract. Approximately 2,000 Fresh Express employees in the U.S. are covered by labor contracts. Fresh Express labor contracts covering approximately 1,000 employees expire in 2014 and no contracts are currently expired or under negotiation.
International Operations
We operate in many countries outside the United States, including in Central America, Europe and the Middle East. Information about our operations by geographic area can be found in Note 18 to the Consolidated Financial Statements included in Exhibit 13. Our global activities are subject to risks inherent in operating in those countries, including: government regulation; currency restrictions, fluctuations and other restraints; import and export restrictions; burdensome taxes; risks of expropriation; threats to employees; political instability; terrorist activities including extortion; and risks of U.S. and foreign governmental action in relation to us. Should such circumstances occur, we might need to curtail, cease or alter our activities in a particular region or country. Trade restrictions apply to certain countries, such as Iran and Syria, that require U.S. government authorization for sales there; notwithstanding the broad trade sanctions against these countries, under current U.S. law and licenses issued thereunder, we are authorized to sell food products to specific customers in these countries. Our operations in some Central American countries are dependent upon leases and other agreements with the governments of these countries. For more information on leases used for the cultivation of bananas and support activities, see "Item 2 - Properties." Refer to international operations in "Management Discussion and Analysis of Financial Condition and Results of Operations" in Exhibit 13 for information on how changes in EU duties rates have affected us and may affect us in the future, as well as description of other governmental trade negotiations that could be significant to us.
Our international operations involve a variety of currencies, and our most significant exposure is to the euro. Approximately 40% of our total sales were outside the United States with approximately 30% of our total sales in Core Europe in each of 2013, 2012 and 2011. Sales and operating expenses in our Core European markets are denominated in primarily euros, as well as other European currencies. We also have significant operations in Latin America that result in costs incurred in those local currencies; however banana and other produce purchase contracts are typically in U.S. dollars. We reduce currency exchange risk from sales originating in currencies other than the U.S. dollar by exchanging local currencies for dollars promptly upon receipt. We further manage our currency exposure with hedging instruments, such as average rate euro put options, collars and forward contracts, to hedge the dollar value of our estimated euro net sales exposure up to 18 months into the future. For information with respect to our hedging activities, see Notes 1 and 11 to the Consolidated Financial Statements and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in Exhibit 13.
7
In the United States, the Perishable Agricultural Commodities Act affords producers, sellers and buyers of fresh agricultural produce, such as the company and certain customers, special rights in seeking to collect payment from customers, including those that are insolvent or bankrupt. Similar protection does not exist in other jurisdictions.
For more information on certain risks of international operations, see "Item 1A - Risk Factors."
Other Legal and Compliance Risks
Our worldwide operations are subject to numerous laws and governmental regulations, ranging from environmental, food safety and product labeling to laws regarding matters such as bribery and improper payments, regulation of competition, labor and employment and government contracting. Even in managing our internal operations, we must comply with the commitments we have made in contracts and other third party dealings, and ensure that our counterparties comply with their commitments to us. There is also a risk that legal or regulatory requirements will be changed or that administrative policies will change. For example, concerns about data privacy and cybersecurity in recent years have resulted in more regulation and more activity by regulators. We believe we are substantially in compliance with applicable regulations. However, actions by regulators in the past have required, and in the future may require, operational modifications or capital improvements at various locations. In addition, if violations occur, regulators can impose fines, penalties and other sanctions including requirements to implement modifications and improvements in our operations. In addition, we have been and may in the future be subject to private lawsuits alleging that our operations caused personal injury or property damage.
Additional Information
Through our website www.chiquita.com, we make available free of charge our reports on Forms 10-K, 10-Q and 8-K, and any amendments, shortly after they are filed with the SEC. Our corporate governance policies, board committee charters and Code of Conduct are also available on our website. To access these documents go to http://investors.chiquita.com and click on SEC Filings or Corporate Governance, respectively. A copy of any of these documents will be provided to any shareholder upon request to the Corporate Secretary, Chiquita Brands International, Inc., 550 South Caldwell Street, Charlotte, North Carolina, 28202 or by calling (980) 636-5000. The documents available on our website are not incorporated by reference into this report.
8
| ITEM 1A. | RISK FACTORS |
In evaluating and understanding us and our business, you should carefully consider (1) the risks described below, in conjunction with (2) all of the information set forth in this Form 10-K, including the Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Exhibit 13 and (3) information in our other filings with the SEC, including any future reports on Forms 10-Q and 8-K, which may include additional or updated risk factors. These are not the only risks we face. Additional risks not presently known or which we currently deem immaterial may also affect our business operations, and even the risks identified below may adversely affect our business in ways we cannot currently anticipate. Our business, financial condition or results of operations could be materially adversely affected by any of these risks.
Our business strategy includes reducing costs, which we may not be able to achieve or sustain on a long-term basis.
In August 2012, we announced a plan to strategically transform the company into a branded commodity operator. The cost of these activities totaled approximately $18 million in the year ended December 31, 2012. This initiative has reduced costs and improved our competitive position by focusing our resources on our banana and salad businesses, reducing investment in non-core products, reducing overhead and manufacturing costs and limiting consumer marketing activities. This initiative resulted in annual savings of at least $60 million beginning in 2013, which included cost savings of approximately $25 million from headcount reductions and approximately $35 million of annual savings from improvements in our value chain, such as reconfiguring our ocean shipping and implementing productivity improvements on our owned farms. In addition, our headquarters relocation generated ongoing operating cost savings of more than $4 million annually beginning in 2013 from the benefits of consolidation of locations, more efficient staffing, lower rent and reduced travel costs. We are eligible for state, local and other incentives through 2022.
It is possible that we may not be successful maintaining the operating efficiencies and cost savings from these efforts in these amounts or we may not meet all the requirements necessary to receive, or continue to retain, the full amount of state and local incentives. Savings from these initiatives are subject to inherent uncertainties and a variety of risks, including euro-dollar exchange rates, fuel prices, shipping rates and the absence of substantially adverse weather events, and there can be no assurances that these cost savings will be maintained in full or at all. We cannot be certain that we will not be required to implement further restructuring activities, make additions or other changes to our workforce based on other cost reduction measures or changes in the markets and industry in which we compete. In addition, future business conditions and events may impede our ability to continue to realize any benefits of our restructuring initiatives.
The highly competitive environment in which we operate, as well as consolidation and other changes among our customers, may reduce the pricing and volume of some of our products and may limit our ability to pass on increased costs to our customers.
We primarily sell to retailers and wholesalers. Bidding for contracts or arrangements with retailers, particularly chain stores and other large customers, is highly competitive, and the prices or other terms of our contract bids may not be sufficient to retain existing business, maintain current levels of profitability or to obtain new business. Continuing industry consolidation (horizontally and vertically) and other factors have increased the buying leverage of the major grocery retailers in all of our markets, which may put further downward pressure on our pricing and volume and could adversely affect our results of operations.
In addition to direct competition with other industry participants, we are facing new competition from a few major retailers that have begun to purchase a portion of their fruit directly from independent growers, or to contract directly for transportation of tropical fruit products. While these activities are currently a small part of the market, a significantly increased commitment by retailers to manage their own supply chain could change industry dynamics in ways that reduce our revenues and profitability.
Global economic uncertainties continue to affect consumers' purchasing habits and customer financial stability, which may affect sales volume and profitability on some of our products and have other impacts that we cannot fully predict.
As a result of continuing global economic uncertainties, price-conscious consumers may replace their purchases of our premium and value-added products with lower-cost alternatives, which could affect the price and volume of some of these products. For example, sales of our bananas in Europe, where they are sold as a premium brand at a premium price, may suffer if consumers shift to "value" or unbranded bananas. Similarly, the volume or profitability of our North American salads business may be adversely affected if consumers are reluctant to pay a premium for value-added salads or if they replace purchases of our branded products with lower-priced alternatives.
In Europe, the continuing public concerns over sovereign debt and related European financial restructuring efforts, may cause the value of the European currencies, including the euro, to deteriorate, which in turn could adversely impact our euro-denominated sales and working capital. These sovereign debt concerns may contribute to instability in global credit markets, and economic deterioration in Europe could adversely impact demand for our products and product pricing.
9
In addition, the full effect and duration of the current global economic downturn on customers, vendors and other business partners cannot be determined. For example, major customers or vendors may have financial challenges unrelated to Chiquita that could result in a decrease in their business with us, breaches of obligations to us or, in certain cases, cause them to file for bankruptcy protection. Although we exercise prudent oversight of the credit ratings and financial strength of our major business partners and seek to diversify our risk from any single business partner, we cannot be sure that there will not be one or more commercial or financial partners that are unable to meet its contractual commitments to us.
Many of our products are subject to significant price fluctuations, and the planting, harvesting and shipping cycle of certain of our produce products may limit our ability to respond effectively to these fluctuations and other changes in the market.
In markets where we do not have fixed price contracts, the selling price received for each type of produce depends on several factors, including the availability and quality of the produce item in the market and the availability and quality of competing types of produce. For example, in European and the Mediterranean markets, bananas and other produce are sold primarily on the basis of weekly price quotes, even for customers with whom we have annual supply agreements. These prices may fluctuate significantly due to supply conditions, seasonal trends, transportation costs, currency exchange rates, competitive dynamics and other factors. Even in markets where we do have fixed price contracts, these factors may cause decreased demand for, or increased price pressure on, our products at certain times.
For many produce products, we make decisions about the specific source and quantities to grow or purchase at the beginning of the applicable growing season, which is typically many months before the product will be sold. Likewise, due to the time required for transportation, which can be three weeks for certain parts of Europe, we allocate harvested fruit among our markets well before the fruit is sold. Accordingly, although we make these supply decisions and allocate produce to each market based on our expectations of market conditions, these conditions may change before the produce is sold. Moreover, because of both the long lead times necessary to bring produce products to market and the perishable nature of these products, we generally cannot time our purchase and sale of products to take advantage of market changes or to avoid selling at unfavorable prices. If we are forced to sell produce at lower prices than we expected when we made our acquisition or allocation decisions, we may not be able to achieve our expected profit, or in extreme cases, recover our costs. Although our arrangements with independent banana growers allow us to avoid incurring transportation costs to bring surplus fruit to market by paying a liquidation price, rather than buying our contracted volume of fruit, we are typically unable to recover the other costs we incur in connection with such unsold surplus fruit.
Adverse weather conditions, natural disasters, crop disease, pests and other natural conditions can impose significant costs and losses on our business.
Bananas, lettuce and other produce can be affected by adverse weather conditions, including drought, temperature extremes, hurricanes, windstorms and floods. Floods in particular may affect bananas, which are typically grown in tropical lowland areas. Fresh produce is also vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the stage of agricultural production at the time of infection or infestation, the type of treatment applied and climatic conditions. Unfavorable growing conditions caused by these factors can reduce both crop size and crop quality. In extreme cases, entire harvests may be lost. These factors may result in lower sales volume and, in the case of farms we own or manage, increased costs due to expenditures for additional agricultural techniques or agrichemicals, the repair of infrastructure, and the replanting of damaged or destroyed crops. Incremental costs, including transportation, may also be incurred if we need to find alternate short-term supplies of bananas, lettuce or other produce from other growers. Such costs may reduce our ability to profitably meet our supply obligations to our customers, particularly in North America, where our typical fixed-price per box contract structures can make it difficult to recover these higher costs. For example, as a result of flooding which affected some of our owned farms in 2008 and 2009, we incurred approximately $33 million of higher costs, including logistics costs, related to rehabilitating the farms and procuring replacement fruit from other sources (to the extent it was available).
From time to time, we have experienced shipping interruptions, port damage and changes in shipping routes as a result of weather-related disruptions. While we believe we are adequately insured and would attempt to transport our products by alternative means if we were to experience an interruption, an extended interruption in our ability to ship and distribute our products could have a material adverse effect on us.
We expect increases in commodity and raw product costs, including purchased fruit, fertilizer, paper, shipping costs and fuel; to the extent that we cannot pass them on to our customers, they could adversely affect our operating results.
Our fuel-related costs have increased substantially in recent years, and we generally expect these costs to increase in the future. Bunker fuel, in particular, is an important variable component of our transportation costs. While we use fuel surcharges and forward contracts to offset and mitigate the effects of increases in the price of bunker fuel, there is lag time between price increases and increases in the surcharge index; in addition, these strategies will not eliminate all the adverse effects of price increases on our business, particularly over the long-term. In addition, diesel fuel and other transportation costs are significant components of much of the cost of produce that we purchase from growers and distributors. If the price of any of these items increases significantly, we may not be able to pass on those increases to our customers. We also generally expect the prices we pay to purchase produce to
10
increase over time. During 2013, approximately one-third of our bananas were produced by subsidiaries on owned farms and the remainder was purchased from independent growers under short- and long-term fruit supply contracts; all of our lettuce and other produce is purchased from independent growers under short- and long-term contracts. Increased costs for purchased fruit have negatively affected our operating results in the past, and they may adversely affect our operating results in the future. Many external factors may affect the cost and supply of fresh produce, including: wage and other input cost inflation (e.g. paper, packaging, fertilizers); market fluctuations; currency fluctuations; changes in governmental regulations, including exit prices for bananas (which are set by the government in several banana exporting countries); agricultural programs; severe and prolonged weather conditions; disease; natural disasters; labor relations (including increased payments to growers in lieu of increases to government exit prices, specifically in Costa Rica); and other factors. Many other commodity food products are experiencing major price increases, which may affect pricing dynamics in the industry in ways that affect us adversely. If the price of the fresh produce that we purchase increases significantly, we may not be able to effectively pass these costs along to our customers and consumers.
Our ocean shipping needs are provided under a combination of long-term charters with negotiated fixed rates and market rates for ships under short-term charters and transportation contracts. Although short-term ship charter rates and container shipping rates have decreased in recent years, as the global economy recovers, rates may increase in the future because of declining global refrigerated cargo and container capacity or other market conditions. Furthermore, since our shipping configuration may rely more on short-term charters and transportation contracts, we may be more susceptible to these increases in the future than we have in the past.
Our operations and products are regulated in the areas of food safety and protection of human health and the environment.
Our worldwide operations and products are subject to inspections by environmental, food safety, health and customs authorities and to numerous governmental regulations, including those relating to the use and disposal of agrichemicals, the documentation of food shipments, the traceability of food products, and labeling of our products for consumers, all of which involve compliance costs. Changes in regulations or laws in the past have required, and in the future may require, operational modifications or capital improvements at various locations. For example, the United States has recently enacted a new food safety law, the Food Safety Modernization Act (the "Act"). Although we believe that our food safety standards exceed those prescribed by the Act, implementing regulations have not yet been issued and may require us to make changes to our processes and procedures that could require us to incur unanticipated costs. If violations occur, regulators can impose fines, penalties and other sanctions. In some circumstances, we may decide or be required to recall a product if we or regulators believe it poses a potential risk. For example, we had five separate occasions in 2012 where we voluntarily recalled certain lettuce products, as a precaution, although none of the recalls arose from or resulted in any food-borne disease outbreaks. Although we maintain insurance to cover certain recall losses, this insurance does not cover all events and, even when an event is covered, our retention or deductible may be significant. The costs of these modifications and improvements and of any fines, penalties and recalls could be substantial. Although we maintain and continue to invest in high food safety standards, no precaution can completely eliminate food safety risks from fresh produce.
We can be adversely affected by actions of regulators or if other events cause consumers to lose confidence in the safety and quality of certain food products or ingredients, even if our products are not implicated. As a result, we may also elect or be required to incur additional costs aimed at increasing consumer confidence in the safety of our products.
We are subject to the risk of product liability claims.
The sale of food products for human consumption involves the risk of injury to consumers. While we believe we have implemented practices and procedures in our operations to promote high-quality and safe food products, we cannot be sure that consumption of our products will not cause a health-related illness or injury in the future or that we will not be subject to claims or lawsuits relating to such matters. Even as we improve our food safety practices, we cannot be sure that we will not have claims or events that will affect our reputation, and no precaution can completely eliminate food safety risks from food and beverage products.
Although we maintain product liability insurance in an amount which we believe to be adequate, claims or liabilities of this nature might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others or they might exceed the amount of our insurance coverage. In addition, large retail customers often require us to indemnify them for claims made by consumers who have purchased our products, regardless of whether the claim arises from our handling of the product.
Claims or other events or rumors relating to the "Chiquita" or "Fresh Express" brands could significantly affect our business.
The success of our business strategy depends on our continued ability to use our trademarks and related brands in order to increase awareness and further develop our products. Consumers and institutions associate the “Chiquita” and “Fresh Express” trademarks and related brands with high-quality and safe food products, as well as responsible business practices, which are an integral part of our business. If our efforts to protect our trademarks and related brands are not adequate, or if any third party
11
infringes on or violates our intellectual property, either in print, on the Internet or through other media, the value of our trademarks, brands and other intellectual property may be harmed, which could have a material adverse effect on our products and our business. We have licensed the Chiquita brand to several third parties over whom we have limited control, and acts or omissions by these third parties can reflect on our products and our business. While we try to ensure that the quality of our brands is maintained by all of our licensees, we cannot be certain that these licensees will not take actions that adversely affect the value of our intellectual property or reputation. Furthermore, any events, rumors or negative publicity regarding the quality and safety of our food products or our business practices, even if baseless or as the result of actions of others in our industry, may adversely affect the value of our brand names and the demand for our products.
Labor issues can increase our costs or disrupt our operations; pressure to increase union representation could adversely affect our operations; and changes in immigration laws could impact the availability of produce purchased from third-party suppliers.
Most of our employees working in Central America are covered by labor contracts. Contracts covering approximately 7,000 employees are currently being negotiated, and contracts covering approximately 1,000 employees are set to expire in 2014. Under applicable law, employees are required to continue working under the terms of the expired contract. Approximately 2,000 of our Fresh Express employees, all of whom work in the United States, are covered by labor contracts. We cannot be sure that we will be able to successfully renegotiate our labor contracts on commercially reasonable terms as they expire or that we will be able to pass on any increased labor costs to our customers.
We are exposed to the risks of strikes or other labor-related actions in both our owned farms and those of independent growers or service providers supplying us. Labor stoppages and strikes may result in increased costs and, in the case of agricultural production, decreased crop quality. When prolonged strikes or other labor actions occur in agricultural production, growing crops may be significantly damaged or rendered un-harvestable as a result of the disruption of irrigation, disease and pest control and other agricultural practices. In addition, our non-union workforce, particularly in our salads and healthy snacks business in the U.S., has been subject to union organization efforts from time to time, and we could be subject to future unionization efforts. While we respect freedom of association, increased unionization of our workforce could lead to increases in our operating costs and/or constraints on our operating flexibility.
We purchase lettuce and other salad ingredients from many third parties that grow these products in the United States. The personnel engaged for harvesting operations typically include significant numbers of immigrants who are authorized to work in the U.S. The availability and number of these workers is subject to decrease if there are changes in U.S. immigration laws. A scarcity of available personnel to harvest agricultural products in the U.S. could increase our costs for those products or could lead to product shortages.
Our international operations subject us to numerous risks.
We have international operations in countries throughout the world, including in Central America, Europe, the Middle East and China. These activities are subject to risks inherent in operating in those countries, including government regulation, political and economic stability, currency restrictions, fluctuations and other restraints, import and export restrictions, burdensome taxes, risks of expropriation, threats to employees, political instability, terrorist activities, including extortion, and risks of U.S. and foreign governmental regulation and action in relation to these operations. Under certain circumstances, we (i) might need to curtail, cease or alter our activities in a particular region or country, (ii) might not be able to establish or expand operations in certain countries, and (iii) might be subject to fines or other penalties. For example, in 2012, increasing international sanctions against Iran made it difficult for importers to obtain U.S. dollars, euros or other suitable currencies in sufficient quantity on a regular basis. Over the course of 2012, the company's receivable balance with these customers increased, and we established payment plans with each of these customers to reduce their balances. Certain customers have so far been able to find acceptable methods of payment to comply with their payment plans. However, some customers have not, and as a result the company recorded a reserve of $9 million in 2012, with an additional $2 million in 2013 as a result of further delinquency and other repayment risk. If we are able to collect any portion of these receivables, the reserve may be reversed as appropriate. There can be no assurance that we would not be required to establish additional reserves on other customer receivables in the Middle East. Also, in 2010, Iran suspended the issuance of import licenses for bananas; although the importers in Iran to whom we sell had sufficient licenses that our imports into Iran were not affected, this type of import and export control could significantly affect our ability to market bananas in, or export bananas from, certain countries. Our ability to sell our products to certain customers, countries or regions may be affected by U.S. or other applicable laws. For example, various trade sanctions against Iran and Syria require U.S. government authorization for sales there; notwithstanding the broad trade sanctions against these countries, under current U.S. law and licenses issued thereunder, we are authorized to sell food products to specific customers in these countries. We source bananas from the Philippines for sale in the Middle East under a long-term purchase contract with a former joint venture partner that has committed volumes through 2016. We continue to develop other markets for these bananas, such as Iraq and Saudi Arabia, to diversify our risk in the region, but we cannot give assurances of our ability to do so.
12
As described in Management's Discussion and Analysis of Financial Condition and Results of Operations - Operations - Banana Segment, included in Exhibit 13, free trade area agreements ("FTAs") between the EU and certain Latin American countries were initialed and implemented in 2012 and 2013, that require, among other things, the banana volumes assigned to relevant countries be administered through export licenses. Implementation of an export license system in the 1990's (subsequently ruled illegal) significantly increased our logistics and other export costs. Because questions remain over how the banana volume and export licensing rules will be applied over time, it is still unclear what, if any, effect the new FTAs will have on our operations.
In addition, as a means to increase tax revenue, governments are making transfer price enforcement a top priority by increasing the number of transfer price audits and creating new challenges for taxpayers. There is also increased legislative activity and many governments are introducing transfer pricing rules for the first time, particularly in Latin America. In general, transfer pricing rules are intended to ensure that cross-border sales among related entities are at arms-length to capture taxable profit or loss in each jurisdiction relative to the value added by a company in that jurisdiction. However, transfer pricing rules and application of those rules can vary widely between jurisdictions and can be applied inconsistently. As described in Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - Accounting for Income Taxes and Note 15 to the Consolidated Financial Statements, both included in Exhibit 13, Ecuador is challenging the transfer pricing practices of major banana exporters and has assessed $15 million in income taxes, penalties and interest related to transfer pricing in 2008 and 2009. If Ecuador applies a similar methodology for tax years 2010 to present, additional assessments may be made. While we believe appropriate transfer pricing was applied in Ecuador and that it is more-likely-than-not that we will succeed upon appeal of these assessments, the outcome may not be known for a significant period of time and may involve significant costs. Additionally, other Latin American countries such as Costa Rica and Panama are implementing transfer pricing rules. While we believe we have taken appropriate measures to comply with these legislative changes, the actual application of these rules is uncertain and may negatively impact profitability or sourcing options.
We may be subject to substantial damage claims or fines arising from current legal proceedings related to our international operations.
We are currently involved in legal proceedings and investigations, described in more detail in Note 19 to the Consolidated Financial Statements, included in Exhibit 13, and under "Item 3 - Legal Proceedings", involving, among other things, (i) litigation and investigations relating to payments made by our former banana-producing subsidiary in Colombia to a paramilitary group in that country which had been designated under U.S. law as a foreign terrorist organization, activities for which we have already paid penalties to the U.S. Department of Justice, and (ii) customs proceedings in Italy. Based on Italian procedural requirements in some of the Italian customs proceedings, we are currently required to make payments on an installment basis as a result of unfavorable rulings that are being appealed. Although these funds will be returned to us with interest if we ultimately prevail on appeal, the level of installment payments could increase significantly if similar unfavorable rulings are received in other cases, and the requirement to pay is not stayed or suspended. Regardless of the outcomes of these matters, we will incur legal and other fees to defend ourselves in all of these proceedings, which in aggregate may have a significant effect on our consolidated financial statements.
Fluctuations in currency exchange rates may adversely impact our financial results.
Our international operations involve a variety of currencies, with our most significant exposure being to the euro. Both sales and local selling and transportation costs in our core European markets are in euros and other major European currencies. We also have significant operations in Latin America that result in costs in those local currencies; however, our banana and other produce purchase contracts are typically in U.S. dollars. Because produce purchase contracts are typically denominated in U.S. dollars, and produce in Europe and the Middle East typically is sold on the basis of weekly price quotes, local selling prices fluctuate partially as a result of currency exchange fluctuations. We cannot be sure that we can increase our local pricing to offset any unfavorable currency exchange fluctuations, such as the euro weakening against the U.S. dollar.
We reduce currency exchange risk from sales originating in currencies other than the U.S. dollar by exchanging local currencies for dollars promptly upon receipt. We may further reduce our currency exposure for these sales by purchasing hedging instruments to hedge the dollar value of our estimated euro net sales exposure up to 18 months into the future if we believe the cost-benefit is favorable. However, hedging activities cannot eliminate any long-term risk of currency exposure, and while we enter into hedging transactions only with highly-rated financial institutions, we cannot be sure that these institutions will be able to honor their contractual commitments if there were a major disruption in the financial markets.
We have a significant amount of goodwill and other intangible assets on our balance sheet; a substantial impairment of our goodwill or other intangible assets may adversely affect our financial statements.
At December 31, 2013, we had approximately $531 million of intangible assets, including goodwill of $18 million and trademarks of $39 million related to our salad operations, Fresh Express, and $388 million related to the Chiquita trademark. The value of these intangible assets depend on a variety of factors, including the success of our business, earnings growth and market conditions. Accounting standards require us to review goodwill and trademarks at least annually for impairment, and more frequently if impairment indicators are present. Based on the result of lower operating performance of retail value-added salad
13
business, lower retail salad volumes, lower perceived valuation multiples in the packaged salad industry and continuing demand for private label versus branded products, we recorded a 2012 non-cash impairment charge to goodwill at Fresh Express. We cannot be sure that future reviews of our goodwill, trademarks and other intangible assets will not result in additional impairment charges. Although it does not affect cash flow or our compliance under the company's current credit facility, an impairment charge decreases our net income and shareholders' equity.
Our level of indebtedness and the covenants in our debt agreements could adversely affect our ability to execute our growth strategy or to react to changes in our business, and we may be limited in our ability to use debt to fund future capital needs.
We had $670 million of debt outstanding at December 31, 2013. Most of our indebtedness and certain operating leases are issued under debt agreements that (1) require continuing compliance with covenants and (2) limit our ability to borrow additional funds due to limits under these covenants. Our ability to comply with provisions under any of our debt agreements will be affected by our operating results and cash flow, which may be affected by events beyond our control.
If there were an event of default under one of our debt instruments and we were unable to obtain a waiver or amendment, or if we had a change of control, the holders of the affected debt, as well as other holders of debt and leases with cross-default provisions, could cause all amounts outstanding with respect to that debt to be due and payable immediately. Our assets or cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, and there is no guarantee that we would be able to repay, refinance or restructure the payments on those debt securities, affected leases and other contracts.
Although the amounts are volatile, our operations generated positive cash flow in recent years. If our operating results and cash flow continue to decline for any reason, including those beyond our control, it might: (1) cause a default under our debt agreements; (2) increase our vulnerability to adverse economic or industry conditions; (3) limit our flexibility in planning for, or reacting to, changes in our business or industry; (4) further limit our ability to make strategic acquisitions and investments or to introduce related core products; (5) further limit our ability to make capital expenditures; and (6) place us at a competitive disadvantage relative to competitors that have less debt or greater financial resources.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
As of December 31, 2013, we owned more than 35,000 acres and leased approximately 21,000 acres of improved land, in our banana business, principally in Costa Rica, Panama, Honduras and Guatemala, primarily for the cultivation of bananas and support activities. We lease land on the Caribbean coast of Panama from the Republic of Panama. The initial 20-year lease term expires at the end of 2017 and has two consecutive 12-year extension periods. We can cancel the lease at any time with three years prior notice; the Republic of Panama has the right not to renew the lease at the end of the initial term or any extension period, provided that it gives four years prior notice. As of October 2013, the lease was automatically renewed for the first 12-year extension period that starts at the end of 2017. We have improved land in Guatemala that is under lease until 2048 from a government-owned company, where we maintain port operations that support our banana business in that country. In February 2014, we purchased approximately 1,700 acres of banana farms in Honduras that were contiguous to our existing farms. From time to time, we also identify other opportunities to control additional additional acreage for banana production, either through land purchases, leases or through strategic partnerships. We also own warehouses, packing stations, irrigation systems and port loading and unloading facilities used in connection with our banana operations.
We charter cargo ships to serve our core ocean shipping needs that are refrigerated and/or containerized, highly-specialized in both size and technology for international trade in bananas and other refrigerated products. We lease eleven cargo ships (eight refrigerated and three containerized) through mid-2014, with options for up to an additional five years. We have five additional cargo ships (three refrigerated and two containerized) under lease without extension options, with three of these scheduled to expire in late-2014 and two in late-2016. In addition to the arrangements described above, we charter cargo ships on a "spot" or short-term basis which accounted for approximately 3% of our total ocean shipping needs in 2013.
We also lease more than 14,000 containers and approximately 3,000 to 4,000 generator sets and chassis used for inland transportation of these containers. These leases range from 5-8 years and are used for both ocean and ground transportation of bananas, other produce and other cargo. Container leases typically contain extension and purchase options at the end of the lease.
In our Salads and Healthy Snacks segment, we have five processing/distribution plants located in California, Georgia, Illinois, Pennsylvania and Texas. We believe these facilities have capacity for planned growth over at least the next several years. We also have leases of farm land for growing lettuce located in Arizona and California. In June 2012, we entered into a 20-year
14
capital lease agreement for a salad production and warehousing facility in the Midwest (Illinois) that replaced three existing facilities in the region. The lease agreement contains two 5-year extension periods.
We lease the space for our new headquarters in Charlotte, North Carolina under a thirteen-year lease. Our subsidiaries in Europe and the United States also own and lease warehouses, ripening facilities, distribution facilities, office space and other properties in connection with their operations. We also own or lease several administrative facilities in Latin America.
We believe our property and equipment are generally well maintained, in good operating condition and adequate for our present needs. We maintain reasonable and customary insurance programs protecting our financial interest in business assets. Banana crop losses are self-insured because of the high cost of third-party insurance. Our risk of banana crop loss is reduced as a result of internal best practices and mitigation efforts, as well as geographic diversity of banana sources. For further information with respect to our physical properties, see the descriptions under "Item 1 - Business" above, and Note 6 to the Consolidated Financial Statements in Exhibit 13.
CBL, our main operating subsidiary, directly or indirectly owns substantially all our business operations and assets, and directly or indirectly owns substantially all of our trademarks. Substantially all the domestic assets of CBII, CBL and their direct and indirect domestic subsidiaries, other than certain de minimis subsidiaries, have been pledged to secure our obligations under our 7.875% Notes, our ABL Facility and the related guarantees. The pledged assets include 100% of the stock of substantially all of CBII's and CBL's domestic subsidiaries and up to 65% of the stock of certain foreign subsidiaries. See Note 10 to the Consolidated Financial Statements included in Exhibit 13 for a more complete description of the 7.875% Notes and the ABL Facility.
| ITEM 3. | LEGAL PROCEEDINGS |
Information included in Note 19 to the Consolidated Financial Statements included in Exhibit 13, including the descriptions of the Colombia-Related Matters and the Italian Customs Matters, is incorporated herein by reference.
PERSONAL INJURY CASES
For more than 20 years the company has been named - along with chemical manufacturers and other banana producing companies - as a defendant by thousands of plaintiffs alleging sterility and other injuries as a result of exposure to dibromochloropropane ("DBCP"), an agricultural chemical previously used in banana production. There currently are approximately 3,900 active claims pending against Chiquita. In June 2012, nine lawsuits were filed on behalf of approximately 2,960 plaintiffs in Superior Court of Delaware, New Castle County, and in federal court. Only approximately 800 of the plaintiffs allege claims against Chiquita and of that group, approximately half previously filed lawsuits in Los Angeles County where Chiquita was dismissed without prejudice, and about 230 of the claimants were plaintiffs in Louisiana where summary judgment was granted to Chiquita. Chiquita has filed motions to dismiss. The federal court dismissed all of the claims against CBII based on a lack of personal jurisdiction. The other two Chiquita defendants were dismissed from the cases filed by the Louisiana plaintiffs based on the first filed rule. The plaintiffs have appealed those dismissals. The court denied the other two Chiquita defendants' motion to dismiss in the non-Louisiana related cases, but a motion for rehearing has been filed based on the Fifth Circuit's affirmance of the summary judgment in the Louisiana case. In August 2011, a suit was filed in California against Chiquita and other defendants on behalf of approximately 2,500 Philippine plaintiffs who claim they were injured by DBCP while working on banana plantations in the Philippines, and in February 2012 additional Philippine plaintiffs were joined, bringing the total to approximately 2,950. During the fourth quarter 2012, the Court dismissed the case based on the statute of limitations as to the co-defendants, and plaintiffs have appealed that ruling. The case has been stayed as to Chiquita pending resolution of that appeal. In 2008, Chiquita settled 381 claims in the Philippines, however the court has attempted to overturn that settlement. After appeals of the court action, the matter remains pending proof of payment of the settlement amounts. In May and June 2011, seven suits were filed against Chiquita and other defendants in the United States District Court for the Eastern District of Louisiana, on behalf of approximately 250 plaintiffs from Ecuador, Costa Rica and Panama who claim they were injured by DBCP while working on plantations in their countries. In September 2012, the federal court in Louisiana granted all defendants, including Chiquita, summary judgment based on the statute of limitations. In September 2013, the Fifth Circuit affirmed that summary judgment. That judgment is now final. Approximately 260 claims from suits filed in 2004 and 2008 against Chiquita in Superior Court of California, Los Angeles County have been dismissed with leave to re-file in Costa Rica. In May 2012, approximately 582 Costa Rican plaintiffs whose claims were previously dismissed on grounds of forum nonconveniens in the Superior Court of California, Los Angeles County refiled their claims in Costa Rica. For a number of reasons, including the following, the company does not believe that it will incur a material loss as a result of these claims: (i) the vast majority of these plaintiffs have come forward with no evidence of exposure at any facility owned or operated by Chiquita, (ii) the company used DBCP commercially only from 1973 to 1977 while it was registered for use by the U.S. Environmental Protection Agency ("EPA"), (iii) the company discontinued the use of DBCP two years before it was banned by the EPA, and (iv) the company previously settled DBCP claims with the great preponderance of workers whom it believed could have meritorious claims.
15
For more than 20 years, a number of claims have been filed against the company on behalf of merchant seamen or their personal representatives alleging injury or illness from exposure to asbestos while employed as seamen on company-owned ships at various times from the mid-1940s until the mid-1970s. The claims are based on allegations of negligence and unseaworthiness. In these cases, the company is typically one of many defendants, including manufacturers and suppliers of products containing asbestos, as well as other ship owners. Nine of these cases are pending in state courts in various stages of activity. Over the past sixteen years, 26 state court cases have been settled and 46 state court cases have been resolved without any payment. In addition to the state court cases, there are federal court cases (known as the "MARDOC" cases), which are managed under the supervision of the U.S. District Court for the Eastern District of Pennsylvania. A total of approximately 5,500 MARDOC cases have been brought against the company, approximately 5,000 have been dismissed; 46 of these cases had earlier been re-activated against the company, of which 35 cases were dismissed without any settlement payment. The court has been issuing scheduling orders in connection with the company's remaining approximately 500 MARDOC cases, approximately 5% of which are expected to be dismissed without payment during 2014. While the complaints allege a cause for punitive damages, the United States court of Appeals for the Sixth Circuit has held that seamen may not seek punitive damages in personal injury or wrongful death action as a matter of law. Although the company has little factual information with which to evaluate these maritime asbestos claims, management does not believe, based on information currently available to it and advice of counsel, that these claims will, individually or in the aggregate, have a material adverse effect on the consolidated financial statements of the company.
A number of other legal actions are pending against the company. Based on information currently available to the company and on advice of counsel, management does not believe these other legal actions will, individually or in the aggregate, have a material adverse effect on the consolidated financial statements of the company.
Regardless of the outcomes, the company has paid, and will likely continue to incur, significant legal and other fees to defend itself in the proceedings described in Note 19 to the Consolidated Financial Statements included in Exhibit 13, and incorporated herein by reference under Colombia-Related Matters and the Italian Customs Matters, where unfavorable outcomes could be material to our results of operations or financial position.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
16
PART II
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS | |
| AND ISSUER PURCHASES OF EQUITY SECURITIES | ||
As of February 24, 2014, there were 1,361 common shareholders of record. Our common stock is traded on the New York Stock Exchange. Information concerning restrictions on our ability to declare and pay dividends on the common stock, the amount of common stock dividends declared, and price information for the common stock is contained in Notes 10, 17 and 21, respectively, to the Consolidated Financial Statements included in Exhibit 13. This information is incorporated herein by reference.
| ITEM 6. | SELECTED FINANCIAL DATA |
This information is included in the table entitled "Selected Financial Data" included in Exhibit 13 and is incorporated herein by reference.
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS | |
| OF OPERATIONS | ||
This information is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Exhibit 13 and is incorporated herein by reference.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
This information is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations – Market Risk Management – Financial Instruments" included in Exhibit 13 and is incorporated herein by reference.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Consolidated Financial Statements of Chiquita Brands International, Inc., included in Exhibit 13 and including Quarterly Financial Data in Note 21 to the Consolidated Financial Statements, are incorporated herein by reference.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND | |
| FINANCIAL DISCLOSURE | ||
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") is (a) accumulated and communicated to our management to allow timely decisions regarding required disclosure and (b) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As of December 31, 2013, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of that date.
Management's report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rule 13a-15(f). Our management assessed the effectiveness of our internal control over financial
17
reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control – Integrated Framework (1992). As a result of this assessment, our management has concluded that, as of December 31, 2013, our internal control over financial reporting was effective based on the criteria in Internal Control – Integrated Framework (1992). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Please see Management's Responsibility For Financial Reporting in Exhibit 13.
Changes in internal control over financial reporting
We also maintain a system of internal accounting controls, which includes internal control over financial reporting, that is designed to provide reasonable assurance that our financial records can be relied upon for preparation of our consolidated financial statements in accordance with generally accepted accounting principles in the United States and that our assets are safeguarded against loss from unauthorized use or disposition. Based on an evaluation by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, during the quarter ended December 31, 2013, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of independent registered public accounting firm
The Audit Committee of our Board of Directors engaged PricewaterhouseCoopers LLP, an independent registered public accounting firm, to audit our 2013 consolidated financial statements and our internal control over financial reporting and to express opinions thereon. The scope of the audits is set by PricewaterhouseCoopers LLP following review and discussion with the Audit Committee. PricewaterhouseCoopers LLP has full and free access to all of our records and personnel in conducting its audits. Representatives of PricewaterhouseCoopers LLP meet regularly with the Audit Committee, with and without members of our management present, to discuss their audit work and any other matters they believe should be brought to the attention of the Audit Committee. PricewaterhouseCoopers LLP has issued opinions on our 2013 consolidated financial statements and the effectiveness of our internal control over financial reporting. Their report is included in the Consolidated Financial Statements included in Exhibit 13.
| ITEM 9B. | OTHER INFORMATION |
From time to time executive officers may adopt, extend or replace written stock trading plans ("10b5-1 Plans") in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Company directors and officers entering into or modifying 10b5-1 Plans must comply with the company's written guidelines for these plans, which require, among other things, that plans be entered into during an open trading window period and that the first trades under the plan (or following any modification of a plan) not occur prior to the next open trading window period. Company approval is required for any termination or modifications of an existing 10b5-1 Plan.
Some executive officers enter into 10b5-1 Plans for the purpose of selling shares in an amount corresponding to a portion of taxes due upon vesting of restricted stock unit awards. In accordance with the terms of the company's Stock and Incentive Plan, participants may elect to surrender to the company a portion of the shares they would otherwise be entitled to receive upon vesting of a restricted stock unit award to cover tax withholding due upon vesting. Because tax laws and accounting rules limit the amount which can be withheld upon vesting to cover applicable taxes, these 10b5-1 Plans provide for the sale of an incremental amount of shares corresponding to the amount of taxes that are expected to be due in excess of the required statutory minimum tax withholding. The sales under the 10b5-1 Plans will occur on the vesting dates of the awards, except that, in accordance with the company's 10b5-1 Plan guidelines, for shares vesting before the beginning of the company's next window period following adoption of a 10b5-1 Plan, (in which case the corresponding sales will not occur until the opening of the next window period, three business days after release of the company's next quarterly financial results).
Shares sold pursuant to any 10b5-1 Plans will be disclosed publicly as required through Form 4 filings and, if applicable, Form 144 filings.
18
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Except for the information relating to our executive officers below, which is as of February 24, 2014, the information required by this Item 10 is incorporated herein by reference from the applicable information set forth in "Election of Directors," "Information About the Board of Directors and Its Committees" and "Security Ownership of Directors and Executive Officers – Section 16(a) Beneficial Ownership Reporting Compliance" which will be included in our definitive Proxy Statement to be filed with the SEC in connection with our 2014 Annual Meeting of Shareholders, and "Item 1 – Business – Additional Information."
Executive Officers of the Registrant
Edward F. Lonergan (age 54) has been our President and Chief Executive Officer since October 2012. Prior to joining the company from February 2006 to October 2011, Mr. Lonergan was President, Chief Executive Officer and Executive Director of Diversey, Inc., a global provider of sustainable cleaning, sanitation and hygiene solutions. Prior to joining Diversey, from May 2002 to December 2005, Mr. Lonergan served as President of the European region for The Gillette Company, a consumer products company, prior to its acquisition by The Procter & Gamble Company in 2005. Prior to joining Gillette, Mr. Lonergan spent more than 20 years at The Procter & Gamble Company, a manufacturer and distributor of consumer products, in various capacities including a variety of leadership positions both domestically and internationally including general management roles in customer business development and in emerging markets.
Rick P. Frier (age 52) has been our Executive Vice President and Chief Financial Officer since September 2013. From April 2013 to September 2013 he served as our Senior Vice President and Chief Financial Officer. Prior to joining Chiquita, Mr. Frier served as Director, Executive Vice President and Chief Financial Officer of Catalina Marketing Corp., a global leader in precision marketing, specializing in the development, delivery and measurement of shopper-driven and marketing campaigns since 2005. Prior to that, from 2001 to 2005, Mr. Frier served as Director, Chief Financial Officer and Chief Operating Officer of Mattress Discounters Inc., a bedding retailer and manufacturer.
Kevin R. Holland (age 52) has been our Executive Vice President and Chief People Officer since September 2013. From October 2007 to September 2013 Mr. Holland served as our Senior Vice President and Chief People Officer and from 2005 to October 2007, he served as our Senior Vice President, Human Resources. Prior to joining us, he served as Chief People Officer of Coors Brewing Company, the primary U.S. operating subsidiary of Molson Coors Brewing Co., from 2003 to June 2005.
Brian W. Kocher (age 44) has been our Executive Vice President and Chief Operating Officer since September 2013. From April 2013 to September 2013 he served as our Senior Vice President and Chief Operating Officer. Prior to that, from February 2012 to April 2013, Mr. Kocher served as the Company’s Chief Financial Officer. He served as our President, Europe and Middle East from January 2011 to February 2012 and as our President, North America from October 2007 to December 2010. He has served the Company in various executive finance positions since 2005.
Manuel Rodriguez (age 64) has been our Executive Vice President, Government and International Affairs and Corporate Responsibility Officer since September 2013. From March 2005 to September 2013 he served as our Senior Vice President, Government and International Affairs and Corporate Responsibility Officer. He has served us in various legal, government affairs and labor relations capacities since 1980.
James E. Thompson (age 53) has been our Executive Vice President, General Counsel and Secretary since September 2013. From July 2006 to September 2013 he served as our Senior Vice President, General Counsel and Secretary. Mr. Thompson served as Senior Vice President and Chief Compliance Officer from April to June 2006 and continued to serve as Chief Compliance Officer from July 2006 to March 2007; he also served as the company's Acting Chief Compliance Officer from April 2010 to January 2011. Prior to joining the Company, he served as Group Vice President, General Counsel and Secretary at McLeodUSA, Inc., a telecommunications service provider.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 is incorporated herein by reference from the applicable information set forth in "Information About the Board of Directors and Its Committees," "Compensation of Executive Officers" and "Compensation of Directors" which will be included in Chiquita's definitive Proxy Statement to be filed with the SEC in connection with the 2014 Annual Meeting of Shareholders.
19
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND | |
| RELATED STOCKHOLDER MATTERS | ||
The information required by this Item 12 is incorporated herein by reference from the applicable information set forth in "Security Ownership of Chiquita's Principal Shareholders," "Security Ownership of Directors and Executive Officers" and "Equity Compensation Plan Information" which will be included in Chiquita's definitive Proxy Statement to be filed with the SEC in connection with the 2014 Annual Meeting of Shareholders.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR | |
| INDEPENDENCE | ||
The information required by this Item 13 is incorporated herein by reference, if any, from the applicable information set forth in "Other Information – Related Person Transactions" and "Information About the Board of Directors and Its Committees" which will be included in Chiquita's definitive Proxy Statement to be filed with the SEC in connection with the 2014 Annual Meeting of Shareholders.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item 14 is incorporated herein by reference from the applicable information set forth in "Other Information – Chiquita’s Independent Registered Public Accounting Firm" which will be included in Chiquita's definitive Proxy Statement to be filed with the SEC in connection with the 2014 Annual Meeting of Shareholders.
20
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| a. | 1. Financial Statements. The following Consolidated Financial Statements of the company and accompanying Report of Independent Registered Public Accounting Firm are included in Exhibit 13: |
Page of Exhibit 13 | ||
| Chiquita Brands International, Inc. | ||
| 22 | ||
| Consolidated Statements of Income for the years ended 2013, 2012 and 2011 | 23 | |
| Consolidated Statements of Comprehensive Income for the years ended 2013, 2012 and 2011 | 24 | |
Consolidated Balance Sheets as of December 31, 2013 and 2012 | 25 | |
| Consolidated Statements of Shareholders' Equity for the years ended 2013, 2012 and 2011 | 26 | |
Consolidated Statements of Cash Flow for the years ended 2013, 2012 and 2011 | 27 | |
| 28 | ||
| Danone Chiquita Fruits SAS | ||
| Unaudited Condensed Financial Statements | ||
| Unaudited Balance Sheet as of December 31, 2012 and 2011 | 83 | |
| Unaudited Statement of Income for the years ended December 31, 2012, 2011 and 2010 | 85 | |
| Notes to Unaudited Condensed Financial Statements | 86 | |
| Audited financial statements: | ||
| Report of Independent Auditors | 89 | |
| Balance Sheet as of December 31, 2011 and 2010 | 90 | |
| Statement of Income for the years ended December 31, 2011 | 92 | |
| Notes to Consolidated Financial Statements | 93 | |
2. Financial Statement Schedules Financial Statement Schedule II—Consolidated Allowance for Doubtful Accounts Receivable and Consolidated Change in Tax Valuation Allowance are included on page 25 of this Annual Report on Form 10-K. All other schedules are not required under the related instructions or are not applicable. The report of the independent registered public accounting firm on these financial statement schedules for the years ended 2013, 2012 and 2011 is included on page 24 and the respective consent is attached as Exhibit 23.1.
3. Exhibits. See Index of Exhibits (pages 26 through 28) for a listing of all exhibits to this Annual Report on Form 10-K.
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide readers with information regarding their terms and are not intended to provide any other factual or disclosure information about any of the parties to the agreements. Agreements included as exhibits may contain representations and warranties by one or more of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
| • | should not be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; |
| • | may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; |
| • | may apply standards of materiality in a way that is different from what may be viewed as material to investors; and |
| • | were made only as of the date of the agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 4, 2014.
| CHIQUITA BRANDS INTERNATIONAL, INC. | ||
| By | /s/ Edward F. Lonergan | |
| Edward F. Lonergan | ||
| President and Chief Executive Officer | ||
SIGNATURES AND POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Rick P. Frier and James E. Thompson and each of them severally, as his or her true and lawful attorney-in-fact and agent, each acting alone with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and to file the same, with all exhibits thereto, and all documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or any of them or their or such person's substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below as of March 4, 2014:
| /s/Edward F. Lonergan | President and Chief Executive Officer and Director | |
| Edward F. Lonergan | (Principal Executive Officer) | |
| /s/Kerrii B. Anderson | Chairwoman of the Board | |
| Kerrii B. Anderson | ||
| /s/Howard W. Barker | Director | |
| Howard W. Barker, Jr. | ||
| /s/Dr. Clare M. Hasler-Lewis | Director | |
| Dr. Clare M. Hasler-Lewis | ||
| /s/Craig E. Huss | Director | |
| Craig E. Huss | ||
| /s/Jeffrey N. Simmons | Director | |
| Jeffrey N. Simmons | ||
| /s/Steven P. Stanbrook | Director | |
| Steven P. Stanbrook | ||
| /s/Ronald V. Waters III | Director | |
| Ronald V. Waters III | ||
| /s/ Rick P. Frier | Executive Vice President and Chief Financial Officer | |
| Rick P. Frier | (Principal Financial Officer) | |
| /s/ Joseph B. Johnson | Vice President and Chief Accounting Officer | |
| Joseph B. Johnson | (Principal Accounting Officer) | |
22
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
To the Board of Directors of
Chiquita Brands International, Inc.:
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated March 4, 2014 appearing in the 2013 Annual Report to Shareholders of Chiquita Brands International, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
| /s/ PricewaterhouseCoopers LLP |
| Charlotte, North Carolina |
| March 4, 2014 |
23
CHIQUITA BRANDS INTERNATIONAL, INC.
SCHEDULE II – CONSOLIDATED ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
| (In thousands) | 2013 | 2012 | 2011 | ||||||||
| Balance at beginning of period | $ | 19,028 | $ | 6,405 | $ | 9,497 | |||||
| Additions: | |||||||||||
| Charged to costs and expenses | 4,966 | 14,041 | 2,877 | ||||||||
| 4,966 | 14,041 | 2,877 | |||||||||
| Deductions: | |||||||||||
| Write-offs and recoveries | 4,580 | 1,736 | 5,102 | ||||||||
| Foreign exchange and other, net | (188 | ) | (318 | ) | 867 | ||||||
| 4,392 | 1,418 | 5,969 | |||||||||
| Balance at end of period | $ | 19,602 | $ | 19,028 | $ | 6,405 | |||||
SCHEDULE II – CONSOLIDATED CHANGE IN TAX VALUATION ALLOWANCE
| (In thousands) | 2013 | 2012 | 2011 | ||||||||
| Balance at beginning of period | $ | 246,425 | $ | 104,276 | $ | 202,943 | |||||
| Additions: | |||||||||||
| U.S. net deferred tax assets | 47,326 | 41,052 | — | ||||||||
| Valuation allowance | — | 88,554 | — | ||||||||
| Foreign net deferred tax assets | 16,956 | 14,937 | 1,031 | ||||||||
| Prior year U.S. NOL adjustments | — | 387 | 773 | ||||||||
| 64,282 | 144,930 | 1,804 | |||||||||
| Deductions: | |||||||||||
| U.S. net deferred tax assets | — | — | 5,368 | ||||||||
| Valuation allowance release | 1,258 | — | 86,980 | ||||||||
| Foreign net deferred tax assets | — | — | — | ||||||||
| Prior year foreign NOL adjustments | 5,438 | 2,781 | 8,123 | ||||||||
| Prior year U.S. NOL adjustments | 5,306 | — | — | ||||||||
| 12,002 | 2,781 | 100,471 | |||||||||
| Balance at end of period | $ | 298,705 | $ | 246,425 | $ | 104,276 | |||||
24
CHIQUITA BRANDS INTERNATIONAL, INC.
Index of Exhibits
As explained in more detail in Item 15, readers should note that exhibits are included to provide information about the terms of the agreements and are not intended to provide information about the parties to those agreements.
| Exhibit Number | Description | |
| *3.1 | Third Restated Certificate of Incorporation (Exhibit 1 to Form 8-A filed March 12, 2002) | |
| *3.2 | Restated Bylaws, as amended through September 21, 2007. (Exhibit 3.1 to Current Report on Form 8-K filed September 27, 2007) | |
| *4.1 | Indenture, dated as of February 1, 2008, between Chiquita Brands International, Inc. and LaSalle Bank National Association, as trustee, relating to $200 million aggregate principal amount of 4.25% Convertible Senior Notes due 2016. (Form of indenture filed as Exhibit 4.1 to Registration Statement on Form S-3 filed March 8, 2005) | |
| *4.2 | First Supplemental Indenture, dated as of February 12, 2008, between Chiquita Brands International, Inc. and LaSalle Bank National Association, as trustee, containing the terms of $200 million aggregate principal amount of 4.25% Convertible Senior Notes due 2016. (Exhibit 4.2 to Current Report on Form 8-K filed February 12, 2008) | |
| *4.3 | Instrument of Resignation, Appointment and Acceptance, dated as of January 20, 2009, between Chiquita Brands International, Inc., Bank of America, N.A., as successor by merger to LaSalle Bank National Association, and Wells Fargo Bank, National Association, relating to $200 million aggregate principal amount of 4.25% Convertible Senior Notes due 2016. (Exhibit 4.11 to Annual Report on Form 10-K for the year ended December 31, 2008) | |
| *4.4 | Indenture dated as of February 5, 2013 among Chiquita Brands International, Inc., Chiquita Brands L.L.C. and Wells Fargo Bank, National Association, as trustee, relating to $425,000,000 aggregate principal amount of 7.875% Senior Secured Notes due 2021. (Exhibit 4.1 to Current Report on Form 8-K filed February 8, 2013) | |
| *10.1 | Credit Agreement entered into as of February 5, 2013 by and among Chiquita Brands International, Inc., Chiquita Brands L.L.C. and other direct and indirect subsidiaries and certain financial institutions as lenders, and Wells Fargo Bank, National Association as Administrative Agent. (Exhibit 10.1 to Current Report on Form 8-K filed February 8, 2013) | |
| Executive Compensation Plans and Agreements | ||
| *+10.2 | Chiquita Brands International, Inc. Capital Accumulation Plan, conformed to include amendments through January 1, 2013. (Exhibit 10.4 to Annual Report on Form 10-K for the year ended December 31, 2012) | |
| *10.3 | Guaranty, dated March 12, 2001, by Chiquita Brands, Inc. (n/k/a Chiquita Brands L.L.C.) of obligations of Chiquita Brands International, Inc., under its Capital Accumulation Plan. (Exhibit 10-I to Annual Report on Form 10-K for the year ended December 31, 2000) | |
| *10.4 | Amended and Restated Directors Deferred Compensation Program, conformed to include amendments through July 8, 2008. (Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008) | |
| *10.5 | Executive Officer Severance Pay Plan, conformed to include amendments through January 30, 2012. (Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 2011) | |
| *10.6 | Form of Change in Control Severance Agreement being used on and after August 22, 2011. (Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2011) | |
25
| Exhibit Number | Description | |
| *10.7 | Chiquita Brands International, Inc. Chiquita Stock and Incentive Plan, conformed to include amendments through March 31, 2010. (Appendix A to Proxy Statement filed as part of Schedule 14A on April 13, 2010) | |
| *+10.8 | Long-Term Incentive Program 2011-2013 Terms (Exhibit 10.22 to Annual Report on Form 10-K for the year ended December 31, 2010) | |
| *+10.9 | Long-Term Incentive Program 2012-2014 Terms (Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2012) | |
| *10.10 | Form of Grant Notice for Long-Term Incentive Program 2013-2015 Terms (Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2013) | |
| *10.11 | Form of Restricted Share Agreement with non-management directors (Exhibit 10-u to Annual Report on Form 10-K for the year ended December 31, 2002) | |
| *10.12 | Form of Amendment to Restricted Stock Award and Agreement with non-management directors which is compliant with IRC§409A. (Exhibit 10.10 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008) | |
| *10.13 | Form of Restricted Stock Award and Agreement with non-management directors approved on July 15, 2009 used after July 15, 2009. (Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2009) | |
| *+10.14 | Form of Restricted Stock Award and Agreement for employees, including executive officers, approved on July 15, 2009, applicable to grantees who may attain “Retirement” prior to issuance of the shares. (Exhibit 10.10 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2010) | |
| *+10.15 | Form of Restricted Stock Award and Agreement for employees, including executive officers, approved on July 15, 2009, applicable to grantees who will not attain “Retirement” prior to issuance of the shares. (Exhibit 10.11 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2010) | |
| *10.16 | Form of Restricted Stock Award and Agreement for employees, including executive officers, approved on February 14, 2011, applicable to grantees who may attain “Retirement” prior to issuance of the shares. (Exhibit 10.37 to Annual Report on Form 10-K for the year ended December 31, 2010) | |
| *10.17 | Form of Restricted Stock Award and Agreement for employees, including executive officers, approved on February 14, 2011, applicable to grantees who will not attain “Retirement” prior to issuance of the shares. (Exhibit 10.38 to Annual Report on Form 10-K for the year ended December 31, 2010) | |
| *10.18 | Employment Agreement entered into October 1, 2012 between Chiquita Brands International, Inc. and Edward F. Lonergan. (Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2012) | |
| *10.19 | Restricted Stock Unit Award Agreement from Chiquita Brands International, Inc. to Edward F. Lonergan, dated October 8, 2012, with respect to an aggregate 231,065 shares of Common Stock. (Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2012) | |
| *10.20 | Stock Option Award Agreement from Chiquita Brands International, Inc. to Edward F. Lonergan, dated October 8, 2012, with respect to an aggregate 1,440,062 shares of Common Stock. (Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2012) | |
| 13 | Chiquita Brands International, Inc. consolidated financial statements, management's discussion and analysis of financial condition and results of operations, and selected financial data to be included in its 2013 Annual Report to Shareholders. | |
| 21 | Chiquita Brands International, Inc. Subsidiaries | |
26
| Exhibit Number | Description | |
| 23.1 | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | |
| 23.2 | Consent of PricewaterhouseCoopers Audit SA, Independent Accountants, relating to financial statements of Danone Chiquita Fruits SAS | |
| 24 | Powers of Attorney (included in signature page) | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
| 32 | Section 1350 Certifications | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| * | Incorporated by reference. |
| + | Portions of these exhibits have been omitted pursuant to a request for confidential treatment. The omitted portions have been filed with the Commission. |
27