Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. CHIQUITA BRANDS INTERNATIONAL INC (101063) 10-Q published on Nov 04, 2015 at 4:36 pm
Reporting Period: Sep 29, 2015
As previously disclosed, the tax authority in Ecuador challenged the transfer pricing practices of major banana exporters and assessed $23 million of income taxes, penalties and interest related to transfer pricing from 2008 through 2010 and $5 million of statutorily required profit sharing related to transfer pricing from 2010. In the third quarter of 2015 we successfully negotiated with the Ecuadorian tax authority and settled the outstanding tax assessments relating to transfer pricing and profit sharing for 2008 and 2009, and reached a preliminary settlement for the 2010 tax year. We paid $3 million to the Ecuadorian tax authority and believe there will be no additional significant assessments.
Insurance Recovery. We have provided notice of the ATS and ATA lawsuits to the insurers that issued primary and excess general liability insurance policies during the relevant years. The insurers have either reserved the right to deny coverage or denied coverage for these lawsuits. In 2008, we commenced litigation in state court in Ohio against three of our primary insurers seeking coverage for defense costs incurred in connection with the ATA and ATS lawsuits; a fourth primary insurer was later joined to that lawsuit. We entered into settlement agreements under which three of our primary insurers agreed to pay, in total, approximately 40 percent of our defense costs in the ATA and ATS lawsuits. In late 2012, one of these settling insurers paid the full amount of a settlement in an ATA lawsuit. In June 2013, we received notice that the two other settling insurers, which had been paying approximately 1 percent of our defense costs, had been placed in liquidation. The fourth primary insurer, National Union, did not settle. In March 2013, the Ohio Court of Appeals held that National Union is not obligated to provide coverage for defense costs in the ATS and ATA lawsuits. The Ohio Supreme Court declined to accept the case for review.
Separate civil customs proceedings were ultimately brought against Chiquita Italia in four Italian jurisdictions, Genoa, Trento, Aosta and Alessandria. In Genoa the Court of Cassation, the highest level of appeal in Italy, issued a decision in favor of Chiquita Italia in September 2013. In Trento the Court of Cassation issued a decision during the fourth quarter of 2013 in favor of Chiquita Italia as to approximately €5.5 million of the €6.6 million total claim including interest, with the remaining amount ruled payable by Chiquita Italia from the deposits already made in these matters. In April 2014, the Italian customs authority filed a request for revocation of this Court of Cassation decision, a request which we do not believe is permitted under Italian law. In Alessandria, Chiquita Italia lost at the trial level, appealed and a favorable decision was published in April 2014. In May 2015 the authorities appealed to the Supreme Court. Chiquita Italia opposed and filed a counter-recourse to the Supreme Court in June 2015. In Aosta, Chiquita Italia lost at the trial level and appealed. The appeal court issued a negative decision in May 2015 and Chiquita Italia has until June 2016 to file an appeal to the Court of Cassation. Socoba brought a claim in Rome trial court (and Chiquita Italia intervened voluntarily) on the issue of whether the forged Spanish licenses used by Socoba should be regarded as genuine in view of the apparent inability to distinguish between genuine and forged licenses. In an October 2010 decision, the Rome trial court rejected Socoba's claim that the licenses should be considered genuine on the basis that Socoba had not sufficiently demonstrated how similar the forged licenses were to genuine Spanish licenses. Socoba has appealed this decision. In an unrelated case addressing similar forged Spanish licenses used in Belgium, the EU Commission advised the customs authorities the same types of licenses challenged in Italy appeared valid on their face and should be treated as genuine.
Cost of Sales. Cost of sales decreased 10.8% on a consolidated basis. The primary drivers of lower costs as compared to the nine months ended September 30, 2014 were operating efficiencies, lower fruit volumes, lower fuel costs and shipping efficiencies. In our Bananas segment, cost of sales decreased due to lower overall volume and spot purchases and improved productivity on our owned farms. Logistical saving through new shipping rotations have also limited costs. In our Salads and Healthy Snacks segment, cost of sales decreased significantly in the nine months ending 2015 as compared to 2014 due to increased operational efficiencies, decreased fuel costs and improved growing conditions from reduced weather impacts on logistic and raw supply costs. Packaging and sizing initiatives beginning in the third quarter of 2014 also resulted in increased value chain savings and lower overall costs during 2015. Other produce cost of sales decreased due to lower volume.
Depending on fuel prices, we could have had significant obligations or amounts receivable under our bunker fuel forward arrangements, although we expected any liability or asset from these arrangements to be offset by the purchase price of fuel. As of September 30, 2015 all bunker fuel forward contracts had settled, with no future positions outstanding and carried at fair value in the Condensed Consolidated Balance Sheets. At December 31, 2014 and September 30, 2014, our bunker fuel forward contracts were a net liability of $16 million and $3 million, respectively. Depending on euro exchange rates, we could have had significant obligations or amounts receivable under our euro-based currency hedging contracts, although we expected any liability or asset from these contracts to be more than offset by an increase in the dollar realization of the underlying euro-denominated sales. As of September 30, 2015 all euro-based currency hedging contracts had settled, with no future positions outstanding and carried at fair value in the Condensed Consolidated Balance Sheets. At December 31, 2014 and September 30, 2014, our euro-based currency hedging contracts were a net asset of $24 million and $22 million, respectively. The amount ultimately due or receivable was dependent upon fuel prices for our bunker fuel forward arrangements or the exchange rate for our euro-based hedging contracts at the dates of settlement. See Quantitative and Qualitative Disclosures About Market Risk below and Note 7 and Note 8 to the Condensed Consolidated Financial Statements for further information about our hedging activities.