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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 9/01/22 Calavo Growers Inc. 10-Q 7/31/22 62:8.2M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 2.19M
2: EX-3.1 Articles of Incorporation/Organization or Bylaws HTML 200K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 23K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 20K
11: R1 Document and Entity Information HTML 69K
12: R2 Consolidated Condensed Balance Sheets HTML 150K
13: R3 Consolidated Condensed Balance Sheets HTML 28K
(Parenthetical)
14: R4 Consolidated Condensed Statements of Operations HTML 115K
15: R5 Consolidated Condensed Statements of Cash Flows HTML 119K
16: R6 Consolidated Condensed Statements of Shareholders' HTML 85K
Equity
17: R7 Description of the business HTML 23K
18: R8 Information regarding our operations in different HTML 283K
segments
19: R9 Inventories HTML 35K
20: R10 Related party transactions HTML 30K
21: R11 Other assets and Intangibles HTML 83K
22: R12 Stock-Based Compensation HTML 83K
23: R13 Other events HTML 38K
24: R14 Fair Value Measurements HTML 56K
25: R15 Noncontrolling interest HTML 45K
26: R16 Earnings per share HTML 63K
27: R17 Mexican IVA taxes receivable HTML 29K
28: R18 Credit Facility HTML 32K
29: R19 COVID-19 Pandemic Impact HTML 21K
30: R20 Closure of Florida facility HTML 23K
31: R21 Description of the business (Policies) HTML 24K
32: R22 Information regarding our operations in different HTML 278K
segments (Tables)
33: R23 Inventories (Tables) HTML 35K
34: R24 Other assets and Intangibles (Tables) HTML 84K
35: R25 Stock-Based Compensation (Tables) HTML 77K
36: R26 Fair Value Measurements (Tables) HTML 53K
37: R27 Noncontrolling interest (Tables) HTML 44K
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39: R29 Description of the business (Details) HTML 19K
40: R30 Information regarding our operations in different HTML 82K
segments - Product (Details)
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segments - Geographic (Details)
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48: R38 Stock-Based Compensation - Narrative (Details) HTML 113K
49: R39 Stock-Based Compensation - Non-options (Details) HTML 46K
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53: R43 Noncontrolling Interest (Details) HTML 30K
54: R44 Earnings Per Share (Details) HTML 54K
55: R45 Mexican IVA taxes receivable (Details) HTML 28K
56: R46 Credit Facility (Details) HTML 53K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
| |
i ☒ | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the quarterly period ended i July 31, 2022
or
| |
i ☐ | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) For the transition period from ______________________ to ______________________ |
Commission File Number: i 000-33385
i CALAVO GROWERS, INC.
(Exact name of registrant as specified in its charter)
| |
i California | i 33-0945304 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
i 1141-A Cummings Road, i Santa Paula, i California | i 93060 | |
(Address of principal executive offices) | (Zip Code) |
( i 805) i 525-1245
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
i Common Stock, $0.001 par value per share |
| i CVGW |
| i Nasdaq Global Select Market |
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. i Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
i Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company i ☐ |
Emerging growth company i ☐ | | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes i ☐ No ☒
Registrant's number of shares of common stock outstanding as of August 31, 2022 was i 17,731,661
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains statements relating to future events and results of Calavo Growers, Inc. and its consolidated subsidiaries (referred to in this report as “Calavo,” the “Company,” “we,” “us” or “our”), including certain projections and business trends, that are "forward-looking statements," as defined in the Private Securities Litigation and Reform Act of 1995, that involve risks, uncertainties and assumptions. These statements are based on our current expectations and are not promises or guarantees. If any of the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, gross profit, expenses, gain/(loss) on Limoneira shares, income/(loss) from unconsolidated entities, earnings, earnings per share, tax provisions, cash flows and currency exchange rates; the impact of COVID-19 on our business, results of operations and financial condition; the impact of acquisitions or debt or equity investments or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of restructuring and integration (including information technology systems integration) plans; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Calavo and its financial performance, whether attributable to Calavo or any of its unconsolidated entities; any statements regarding pending investigations, legal claims or tax disputes; any statements of expectation or belief; any risks associated with doing business internationally (including possible restrictive U.S. and foreign governmental actions, such as restrictions on transfers of funds and COVID-19 and trade protection measures such as import/export/customs duties, tariffs and/or quotas); any risks associated with receivables from and/or equity investments in unconsolidated entities; system security risk and cyber-attacks and any statements of assumptions underlying any of the foregoing.
Risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by the forward-looking statements include, but are not limited to, the following: the ability of our future management team to work together successfully; the impact of Project Uno initiatives on our business, results of operations, and financial condition, including uncertainty as to whether the desired effects will be achieved; the impact of the COVID-19 pandemic on our business, results of operations, and financial condition, including, but not limited to, disruptions in the manufacturing of our products and the operations of the related supply chains supporting our ability to deliver our products to consumers, impacts on our employees and uncertainty regarding our ability to implement health and safety measures for our employees, uncertainties regarding consumer demand for our products, impact on our food service customers, increased costs, the impact of governmental trade restrictions imposed as a result of COVID-19 and the possible adverse impact of COVID-19 on our goodwill and other intangible assets; our ability to raise prices, particularly in our Prepared segment, to offset increases in costs of goods sold, and the impact of such price increases on future net sales; seasonality of our business; sensitivity of our business to changes in market prices of avocados and other agricultural products and other raw materials including fuel, packaging and paper; potential disruptions to our supply chain; risks associated with potential future acquisitions, including integration; potential exposure to data breaches and other cyber-attacks on our systems or those of our suppliers or customers; dependence on large customers; dependence on key personnel, including personnel that have not yet been hired, and the ability of our future management team to work together successfully; potential for labor disputes; reliance on co-packers for a portion of our production needs; competitive pressures, including from foreign growers; risks of recalls and food-related injuries to our customers; changing consumer preferences; the impact of environmental regulations, including those related to climate change; risks associated with the environment and climate change, especially as they may affect our sources of supply; our ability to develop and transition new products and services and enhance existing products and services to meet customer needs; risks associated with doing business internationally (including possible restrictive U.S. and foreign governmental actions, such as restrictions on transfers of funds and COVID-19 and trade protection measures such as import/export/customs duties, tariffs and/or quotas and currency fluctuations); risks associated with receivables from, loans to and/or equity investments in unconsolidated entities, volatility in the value of our common stock; the impact of macroeconomic trends and events; and the resolution of pending investigations, legal claims and tax disputes, including an assessment imposed by the Mexican Tax Administrative Service (the “SAT”) and our defenses against collection activities commenced by the SAT.
For a further discussion of these risks and uncertainties and other risks and uncertainties that we face, please see the risk factors described in our most recent Annual Report on Form 10-K for the fiscal year ended October 31, 2021 filed with the Securities and Exchange Commission and any subsequent updates that may be contained in our Quarterly Reports on Form 10-Q (including this Quarterly Report on Form 10-Q) and other filings with the Securities and Exchange Commission. Forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
2
CALAVO GROWERS, INC.
INDEX
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED, in thousands)
| | | | | | | |
| | July 31, | | | |||
| | 2022 | | 2021 | | ||
| | | | | | | |
Assets |
| |
|
| |
| |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | i 2,505 | | $ | i 1,885 | |
Restricted cash | | | i 961 | | | i 970 | |
Accounts receivable, net of allowances of $ i 4,429 (2022) and $ i 4,816 (2021) | |
| i 78,490 | |
| i 78,866 | |
Inventories | |
| i 36,073 | |
| i 40,757 | |
Prepaid expenses and other current assets | |
| i 9,216 | |
| i 11,946 | |
Advances to suppliers | |
| i 12,698 | |
| i 6,693 | |
Income taxes receivable | |
| i 8,502 | |
| i 11,524 | |
Total current assets | |
| i 148,445 | |
| i 152,641 | |
Property, plant, and equipment, net | |
| i 114,481 | |
| i 118,280 | |
Operating lease right-of-use assets | |
| i 55,838 | |
| i 59,842 | |
Investment in Limoneira Company | |
| i 21,251 | |
| i 27,055 | |
Investments in unconsolidated entities | |
| i 3,533 | |
| i 4,346 | |
Deferred income taxes | |
| i 5,316 | |
| i 5,316 | |
Goodwill | |
| i 28,653 | |
| i 28,653 | |
Intangibles, net | | | i 7,587 | | | i 8,769 | |
Other assets | |
| i 45,421 | |
| i 40,500 | |
| | $ | i 430,525 | | $ | i 445,402 | |
Liabilities and shareholders' equity | | | | | | | |
Current liabilities: | | | | | | | |
Payable to growers | | $ | i 35,748 | | $ | i 23,033 | |
Trade accounts payable | |
| i 11,551 | |
| i 9,794 | |
Accrued expenses | |
| i 51,672 | |
| i 42,063 | |
Dividend payable | |
| — | |
| i 20,330 | |
Other current liabilities | | | i 11,000 | | | i 11,000 | |
Current portion of operating leases | |
| i 6,966 | |
| i 6,817 | |
Current portion of long-term obligations and finance leases | |
| i 1,517 | |
| i 1,587 | |
Total current liabilities | |
| i 118,454 | |
| i 114,624 | |
Long-term liabilities: | | | | | | | |
Borrowings pursuant to credit facilities, long-term | | | i 25,600 | | | i 37,700 | |
Long-term operating leases, less current portion | |
| i 53,437 | |
| i 57,561 | |
Long-term obligations and finance leases, less current portion | |
| i 4,280 | |
| i 5,553 | |
Other long-term liabilities | |
| i 2,915 | |
| i 3,081 | |
Total long-term liabilities | |
| i 86,232 | |
| i 103,895 | |
Commitments and contingencies | | | | | | | |
Shareholders' equity: | | | | | | | |
Common stock ($ i i 0.001 / par value, i i 100,000 / shares authorized; i 17,732 and i 17,686 shares issued and outstanding as of July 31, 2022 and October 31, 2021, respectively) | |
| i 18 | |
| i 18 | |
Additional paid-in capital | |
| i 170,208 | |
| i 168,133 | |
Noncontrolling interest | |
| i 1,183 | |
| i 1,368 | |
Retained earnings | |
| i 54,430 | |
| i 57,364 | |
Total shareholders' equity | |
| i 225,839 | |
| i 226,883 | |
| | $ | i 430,525 | | $ | i 445,402 | |
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | ||||||||
| | July 31, | | | |||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | | ||||
| | | | | | | | | | | | ||
Net sales |
| $ | i 341,991 |
| $ | i 285,008 |
| $ | i 947,501 |
| $ | i 782,407 | |
Cost of sales | |
| i 323,477 | |
| i 277,141 | |
| i 894,017 | |
| i 734,101 | |
Gross profit | |
| i 18,514 | |
| i 7,867 | |
| i 53,484 | |
| i 48,306 | |
Selling, general and administrative | |
| i 16,713 | |
| i 12,387 | |
| i 48,566 | |
| i 40,374 | |
Expenses related to Mexican tax matters | | | i 303 | | | i 1,342 | | | i 1,148 | | | i 1,342 | |
Impairment and charges related to Florida facility closure | | | — | | | — | | | i 959 | | | — | |
Gain on sale of Temecula packinghouse | |
| ( i 54) | |
| ( i 54) | |
| ( i 162) | |
| ( i 162) | |
Operating income (loss) | |
| i 1,552 | | | ( i 5,808) | |
| i 2,973 | |
| i 6,752 | |
Recovery on reserve for FreshRealm note receivable | | | — | | | i 6,000 | | | — | | | i 6,130 | |
Interest expense | |
| ( i 485) | |
| ( i 208) | |
| ( i 1,272) | |
| ( i 573) | |
Other income, net | |
| i 278 | |
| i 180 | |
| i 1,433 | |
| i 792 | |
Unrealized net gain (loss) on Limoneira shares | |
| i 1,225 | |
| ( i 252) | |
| ( i 5,803) | |
| i 6,843 | |
Income (loss) before income taxes and loss from unconsolidated entities | |
| i 2,570 | |
| ( i 88) | |
| ( i 2,669) | |
| i 19,944 | |
Income tax benefit (provision) | |
| ( i 984) | |
| ( i 12,358) | |
| i 363 | |
| ( i 17,073) | |
Net loss from unconsolidated entities | |
| ( i 269) | |
| ( i 469) | |
| ( i 812) | |
| ( i 1,755) | |
Net income (loss) | |
| i 1,317 | |
| ( i 12,915) | |
| ( i 3,118) | |
| i 1,116 | |
Add: Net loss (income) attributable to noncontrolling interest | |
| ( i 17) | |
| ( i 66) | |
| i 185 | |
| i 21 | |
Net income (loss) attributable to Calavo Growers, Inc. | | $ | i 1,300 | | $ | ( i 12,981) | | $ | ( i 2,933) | | $ | i 1,137 | |
| | | | | | | | | | | | | |
Calavo Growers, Inc.’s net income (loss) per share: | | | | | | | | | | | | | |
Basic | | $ | i 0.07 | | $ | ( i 0.74) | | $ | ( i 0.17) | | $ | i 0.06 | |
Diluted | | $ | i 0.07 | | $ | ( i 0.74) | | $ | ( i 0.17) | | $ | i 0.06 | |
| | | | | | | | | | | | | |
Number of shares used in per share computation: | | | | | | | | | | | | | |
Basic | |
| i 17,667 | |
| i 17,630 | |
| i 17,661 | |
| i 17,616 | |
Diluted | |
| i 17,769 | |
| i 17,630 | |
| i 17,661 | |
| i 17,669 | |
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| | | | | | | |
| | Nine months ended July 31, | | ||||
| | 2022 | | 2021 | | ||
| | | | | | | |
Cash Flows from Operating Activities: |
| |
|
| |
| |
Net income (loss) | | $ | ( i 3,118) | | $ | i 1,116 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| i 12,472 | |
| i 12,925 | |
Non-cash operating lease expense | | | i 40 | | | i 57 | |
Net loss from unconsolidated entities | |
| i 812 | |
| i 1,755 | |
Unrealized net loss (gain) on Limoneira shares | |
| i 5,803 | |
| ( i 6,843) | |
Impairment and non-cash charges related to closure of Florida facility | | | i 317 | | | — | |
Gain on reserve for FreshRealm note receivable and impairment of investment | |
| — | |
| ( i 6,130) | |
Stock-based compensation expense | |
| i 2,123 | |
| i 2,818 | |
Gain on sale of Temecula packinghouse | |
| ( i 162) | |
| ( i 162) | |
Gain on disposal of property, plant, and equipment | |
| — | |
| ( i 170) | |
Effect on cash of changes in operating assets and liabilities: | | | | | | | |
Accounts receivable, net | |
| i 376 | |
| ( i 16,137) | |
Inventories | |
| i 4,594 | |
| ( i 5,687) | |
Prepaid expenses and other current assets | |
| ( i 30) | |
| i 2,291 | |
Advances to suppliers | |
| ( i 4,945) | |
| ( i 3,642) | |
Income taxes receivable/payable | |
| i 3,022 | |
| i 4,014 | |
Other assets | |
| ( i 3,205) | |
| ( i 7,003) | |
Payable to growers | |
| i 12,716 | |
| i 18,694 | |
Trade accounts payable, accrued expenses and other liabilities | |
| i 11,369 | |
| i 14,500 | |
Net cash provided by operating activities | |
| i 42,184 | |
| i 12,396 | |
Cash Flows from Investing Activities: | | | | | | | |
Purchases of property, plant, and equipment | |
| ( i 7,738) | |
| ( i 9,639) | |
Loan to Agricola Belher | |
| — | |
| ( i 3,500) | |
Recovery on reserve for FreshRealm note receivable | |
| — | |
| i 6,000 | |
Infrastructure advance to tomato growers | | | — | | | ( i 1,326) | |
Net cash used in investing activities | |
| ( i 7,738) | |
| ( i 8,465) | |
Cash Flows from Financing Activities: | | | | | | | |
Payment of dividend to shareholders | |
| ( i 20,330) | |
| ( i 20,343) | |
Proceeds from revolving credit facility | |
| i 221,500 | |
| i 266,350 | |
Payments on revolving credit facility | |
| ( i 233,600) | |
| ( i 250,900) | |
Payments of minimum withholding taxes on net share settlement of equity awards | | | ( i 95) | | | ( i 650) | |
Payments on long-term obligations and finance leases | |
| ( i 1,357) | |
| ( i 1,152) | |
Proceeds from stock option exercises | |
| i 47 | |
| i 47 | |
Net cash used in financing activities | |
| ( i 33,835) | |
| ( i 6,648) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| i 611 | |
| ( i 2,717) | |
Cash, cash equivalents and restricted cash, beginning of period | |
| i 2,855 | |
| i 4,055 | |
Cash, cash equivalents and restricted cash, end of period | | $ | i 3,466 | | $ | i 1,338 | |
Noncash Investing and Financing Activities: | | | | | | | |
Right of use assets obtained in exchange for new financing lease obligations | | $ | — | | $ | i 1,222 | |
Settlement of Agricola Belher infrastructure advance offset against payable to growers | | $ | i 1,060 | | $ | — | |
Property, plant, and equipment included in trade accounts payable and accrued expenses | | $ | i 309 | | $ | i 375 | |
The accompanying notes are an integral part of these consolidated condensed financial statements.
6
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | | | | | | Additional | | | | | | | | | | |
| | Common Stock | | Paid-in | | Retained | | Noncontrolling | | | | ||||||
| | Shares | | Amount | | Capital | | Earnings | | Interest | | Total | |||||
| | | | | | | | | | | | | | | | | |
Balance, October 31, 2020 | | i 17,661 |
| $ | i 18 |
| $ | i 165,000 |
| $ | i 89,512 |
| $ | i 1,472 |
| $ | i 256,002 |
Exercise of stock options and income tax benefit | | i 2 |
| | — |
| | i 47 |
| | — |
| | — |
| | i 47 |
Payment of min. withholding of taxes on net share settlement of equity awards | | — | | | — | | | ( i 467) | | | — | | | — | | | ( i 467) |
Stock compensation expense | | — |
| | — |
| | i 907 |
| | — |
| | — |
| | i 907 |
Restricted stock issued | | i 23 |
| | — |
| | — |
| | — |
| | — |
| | — |
Avocados de Jalisco noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | ( i 40) |
| | ( i 40) |
Net income attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | i 5,277 |
| | — |
| | i 5,277 |
Balance, January 31, 2021 | | i 17,686 |
| | i 18 |
| | i 165,487 |
| | i 94,789 |
| | i 1,432 |
| | i 261,726 |
Stock compensation expense | | — |
| | — |
| | i 1,357 |
| | — |
| | — |
| | i 1,357 |
Payments of minimum withholding taxes on net share settlement of equity awards | | ( i 2) |
| | — |
| | ( i 135) |
| | — |
| | — |
| | ( i 135) |
Avocados de Jalisco noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | ( i 47) |
| | ( i 47) |
Net income attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | i 8,841 |
| | — |
| | i 8,841 |
Balance, April 30, 2021 | | i 17,684 |
| $ | i 18 |
| $ | i 166,709 |
| $ | i 103,630 |
| $ | i 1,385 |
| $ | i 271,742 |
Stock compensation expense | | — |
| | — |
| | i 554 |
| | — |
| | — |
| | i 554 |
Restricted stock issued | | ( i 1) |
| | — |
| | — |
| | — |
| | — |
| | — |
Payments of minimum withholding taxes on net share settlement of equity awards | | — |
| | — |
| | ( i 48) |
| | — |
| | — |
| | ( i 48) |
Avocados de Jalisco noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | i 66 |
| | i 66 |
Net loss attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | ( i 12,981) |
| | — |
| | ( i 12,981) |
Balance, July 31, 2021 | | i 17,683 | | $ | i 18 | | $ | i 167,215 | | $ | i 90,649 | | $ | i 1,451 | | $ | i 259,333 |
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | | | | | | Additional | | | | | | | |
| | |
| | Common Stock | | Paid-in | | Retained | | Noncontrolling | |
| | ||||||
| | Shares | | Amount | | Capital | | Earnings | | Interest | | Total | |||||
| | | | | | | | | | | | | | | | | |
Balance, October 31, 2021 | | i 17,686 |
| $ | i 18 |
| $ | i 168,133 |
| $ | i 57,364 |
| $ | i 1,368 |
| $ | i 226,883 |
Exercise of stock options and income tax benefit | | i 2 |
| | — |
| | i 47 |
| | — |
| | — |
| | i 47 |
Payment of min. withholding of taxes on net share settlement of equity awards | | — | | | — | | | ( i 44) | | | — | | | — | | | ( i 44) |
Stock compensation expense | | — |
| | — |
| | i 556 |
| | — |
| | — |
| | i 556 |
Restricted stock issued | | i 28 |
| | — |
| | — |
| | — |
| | — |
| | — |
Avocados de Jalisco noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | ( i 117) |
| | ( i 117) |
Net loss attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | ( i 4,043) |
| | — |
| | ( i 4,043) |
Balance, January 31, 2022 | | i 17,716 |
| | i 18 |
| | i 168,692 |
| | i 53,321 |
| | i 1,251 |
| | i 223,282 |
Stock compensation expense | | — | | | — | | | i 812 | | | — | | | — | | | i 812 |
Restricted stock issued | | i 26 | | | — | | | — | | | — | | | — | | | — |
Payments of minimum withholding taxes on net share settlement of equity awards | | — | | | — | | | ( i 51) | | | — | | | — | | | ( i 51) |
Avocados de Jalisco noncontrolling interest | | — | | | — | | | — | | | — | | | ( i 85) | | | ( i 85) |
Net loss attributable to Calavo Growers, Inc. | | — | | | — | | | — | | | ( i 191) | | | — | | | ( i 191) |
Balance, April 30, 2022 | | i 17,742 |
| $ | i 18 |
| $ | i 169,453 |
| $ | i 53,130 |
| $ | i 1,166 |
| $ | i 223,767 |
Stock compensation expense | | — |
| | — |
| | i 755 |
| | — |
| | — |
| | i 755 |
Forfeitures of restricted stock issued | | ( i 10) | | | — | | | — | | | — | | | — | | | — |
Avocados de Jalisco noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | i 17 |
| | i 17 |
Net income attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | i 1,300 |
| | — |
| | i 1,300 |
Balance, July 31, 2022 | | i 17,732 | | $ | i 18 | | $ | i 170,208 | | $ | i 54,430 | | $ | i 1,183 |
| $ | i 225,839 |
See accompanying notes to consolidated condensed financial statements.
7
CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
i1. Description of the business
iBusiness
Calavo Growers, Inc. (referred to in this report as “Calavo”, the “Company”, “we’, “us” or “our”), is a global leader in the avocado industry and a provider of value-added fresh food. Our expertise in marketing and distributing avocados, prepared avocados, and other perishable foods allows us to deliver a wide array of fresh and prepared food products to retail grocery, foodservice, club stores, mass merchandisers, food distributors and wholesalers on a worldwide basis. We procure avocados from California, Mexico and other growing regions around the world. Through our various operating facilities, we (i) sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas, (ii) create, process and package a portfolio of healthy fresh foods including fresh-cut fruit and vegetables, and prepared foods and (iii) process and package guacamole and salsa. We distribute our products both domestically and internationally and beginning in the third quarter of fiscal 2022 we report our operations in i two different business segments: Grown and Prepared.
The accompanying unaudited consolidated condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
/
iRecently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which amends and simplifies the accounting for income taxes by removing certain exceptions and providing new guidance to reduce complexity in certain aspects of the current guidance. This guidance was adopted by the Company during the first quarter of 2022 and did not impact the Company’s financial statements or related disclosures.
/
i2. Information regarding our operations in different segments
On April 13, 2022, the Company issued a press release announcing its plans to reorganize the business into i two reporting segments, Grown and Prepared. The management transition to operate as Grown and Prepared began at the start of the third quarter of 2022. The Grown segment consists of fresh avocados, tomatoes and papayas. The Prepared segment comprises all other products including fresh cut fruits and vegetables, ready-to-eat sandwiches, wraps, salads and snacks, guacamole, and salsa sold at retail and food service as well as avocado pulp sold to foodservice.
As a result of the Company's operating segment realignment, the composition of its reporting units for the evaluation of goodwill impairment was changed. RFG reporting unit goodwill is now included within the Prepared reporting unit. Therefore, the goodwill of $ i 24.7 million, which was previously recorded within the RFG reporting unit, is now within Prepared and the goodwill previously reported as part of the Fresh segment remained unchanged in the amount of $ i 4.0 million and is part of the Grown segment. Prior to the change in its reporting unit, the Company tested goodwill for impairment at the previous reporting unit, which did not result in any impairment charge. Goodwill impairment testing requires significant judgment and management estimates, including, but not limited to, the determination of (i) the number of reporting units, (ii) the goodwill and other assets and liabilities to be allocated to the reporting units and (iii) the fair values of the reporting units which includes forecasted cash flow. The fair value of the Company’s reporting
/8
units is determined using a combination of valuation techniques, including a discounted cash flow methodology. To corroborate the discounted cash flow analysis, a market approach is utilized using observable market data such as comparable companies in similar lines of business that are publicly traded.
These i two business segments are presented based on how information is used by our Chief Executive Officer (our Chief Operating Decision Maker) to measure performance and allocate resources. Selling, general and administrative expenses, as well as other non-operating income/expense items, are evaluated by our Chief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them, to our operating segments. Prior year information has been recast to conform with the new segment disclosures. The sales data in the following tables is presented in thousands:
i
| | | | | | | | | | | | | | | | | | | |
| | Three months ended July 31, 2022 | | Three months ended July 31, 2021 | | ||||||||||||||
|
| |
| |
| | |
| |
| |
| | | | ||||
| | Grown | | Prepared | | Total | | Grown | | Prepared | | Total | | ||||||
| | | | | | | | | | | | | | | | | | | |
Avocados | | $ | i 196,443 | | $ | — | | $ | i 196,443 | | $ | i 148,757 | | $ | — | | $ | i 148,757 | |
Tomatoes | |
| i 8,990 | |
| — | |
| i 8,990 | |
| i 11,344 | |
| — | |
| i 11,344 | |
Papayas | |
| i 2,679 | |
| — | |
| i 2,679 | |
| i 2,683 | |
| — | |
| i 2,683 | |
Other fresh income | |
| i 54 | |
| — | |
| i 54 | |
| i 95 | |
| — | |
| i 95 | |
Fresh-cut fruit | | | — | | | i 59,159 | | | i 59,159 | | | — | | | i 58,703 | | | i 58,703 | |
Fresh-cut vegetables | | | — | | | i 27,299 | | | i 27,299 | | | — | | | i 23,226 | | | i 23,226 | |
Prepared products | |
| — | |
| i 31,083 | |
| i 31,083 | |
| — | |
| i 25,917 | |
| i 25,917 | |
Guacamole | | | — | |
| i 19,606 | |
| i 19,606 | |
| — | |
| i 21,096 | |
| i 21,096 | |
Salsa | |
| — | |
| i 524 | |
| i 524 | |
| — | |
| i 746 | |
| i 746 | |
Total gross sales | |
| i 208,166 | |
| i 137,671 | |
| i 345,837 | |
| i 162,879 | |
| i 129,688 | |
| i 292,567 | |
Less sales allowances | |
| ( i 577) | |
| ( i 2,799) | |
| ( i 3,376) | |
| ( i 1,299) | |
| ( i 5,588) | |
| ( i 6,887) | |
Less inter-company eliminations | | | ( i 470) | | | — | | | ( i 470) | | | ( i 672) | | | — | | | ( i 672) | |
Net sales | | $ | i 207,119 | | $ | i 134,872 | | $ | i 341,991 | | $ | i 160,908 | | $ | i 124,100 | | $ | i 285,008 | |
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended July 31, 2022 | | Nine months ended July 31, 2021 | | ||||||||||||||
|
| |
| |
| | |
| |
| |
| | | | ||||
| | Grown | | Prepared | | Total | | Grown | | Prepared | | Total | | ||||||
| | | | | | | | | | | | | | | | | | | |
Avocados | | $ | i 538,882 | | $ | — | | $ | i 538,882 | | $ | i 398,887 | | $ | — | | $ | i 398,887 | |
Tomatoes | |
| i 36,331 | |
| — | |
| i 36,331 | |
| i 33,963 | |
| — | |
| i 33,963 | |
Papayas | |
| i 8,462 | |
| — | |
| i 8,462 | |
| i 8,081 | |
| — | |
| i 8,081 | |
Other fresh income | |
| i 87 | |
| — | |
| i 87 | |
| i 548 | |
| — | |
| i 548 | |
Fresh-cut fruit | | | — | | | i 151,361 | | | i 151,361 | | | — | | | i 149,652 | | | i 149,652 | |
Fresh-cut vegetables | |
| — | |
| i 82,162 | |
| i 82,162 | |
| — | |
| i 78,030 | |
| i 78,030 | |
Prepared products | | | — | | | i 83,281 | | | i 83,281 | | | — | | | i 68,425 | | | i 68,425 | |
Guacamole | | | — | | | i 56,976 | | | i 56,976 | | | — | | | i 56,557 | | | i 56,557 | |
Salsa | |
| — | |
| i 1,349 | |
| i 1,349 | |
| — | |
| i 2,154 | |
| i 2,154 | |
Total gross sales | |
| i 583,762 | |
| i 375,129 | |
| i 958,891 | |
| i 441,479 | |
| i 354,818 | |
| i 796,297 | |
Less sales allowances | |
| ( i 2,591) | |
| ( i 7,240) | |
| ( i 9,831) | |
| ( i 2,754) | |
| ( i 9,221) | |
| ( i 11,975) | |
Less inter-company eliminations | | | ( i 1,559) | | | — | | | ( i 1,559) | | | ( i 1,915) | | | — | | | ( i 1,915) | |
Net sales | | $ | i 579,612 | | $ | i 367,889 | | $ | i 947,501 | | $ | i 436,810 | | $ | i 345,597 | | $ | i 782,407 | |
9
| | | | | | | | | | | | | |
|
| |
| |
| Interco. |
| | | | |||
| | Grown | | Prepared | | Elimins. | | Total | | ||||
| | (All amounts are presented in thousands) | | ||||||||||
Three months ended July 31, 2022 | | | | | | | | | | | | | |
Net sales | | $ | i 207,589 | | $ | i 134,872 | | $ | ( i 470) | | $ | i 341,991 | |
Cost of sales | | | i 195,818 | | | i 128,129 | | | ( i 470) | | | i 323,477 | |
Gross profit | | $ | i 11,771 | | $ | i 6,743 | | $ | — | | $ | i 18,514 | |
| | | | | | | | | | | | | |
Three months ended July 31, 2021 | | | | | | | | | | | | | |
Net sales | | $ | i 161,580 | | $ | i 124,100 | | $ | ( i 672) | | $ | i 285,008 | |
Cost of sales | | | i 149,378 | | | i 128,435 | | | ( i 672) | | | i 277,141 | |
Gross profit | | $ | i 12,202 | | $ | ( i 4,335) | | $ | — | | $ | i 7,867 | |
| | | | | | | | | | | | | |
|
| |
| |
| Interco. |
| | | | |||
| | Grown | | Prepared | | Elimins. | | Total | | ||||
| | (All amounts are presented in thousands) | | ||||||||||
Nine months ended July 31, 2022 | | | | | | | | | | | | | |
Net sales | | $ | i 581,171 | | $ | i 367,889 | | $ | ( i 1,559) | | $ | i 947,501 | |
Cost of sales | | | i 539,577 | | | i 355,999 | | | ( i 1,559) | | | i 894,017 | |
Gross profit | | $ | i 41,594 | | $ | i 11,890 | | $ | — | | $ | i 53,484 | |
| | | | | | | | | | | | | |
Nine months ended July 31, 2021 | | | | | | | | | | | | | |
Net sales | | $ | i 438,725 | | $ | i 345,597 | | $ | ( i 1,915) | | $ | i 782,407 | |
Cost of sales | | | i 398,370 | | | i 337,646 | | | ( i 1,915) | | | i 734,101 | |
Gross profit | | $ | i 40,355 | | $ | i 7,951 | | $ | — | | $ | i 48,306 | |
For the three months ended July 31, 2022 and 2021, intercompany sales and cost of sales of $ i 0.5 million and $ i 0.7 million between Grown products and Prepared products were eliminated. For the nine months ended July 31, 2022 and 2021, intercompany sales and cost of sales of $ i 1.6 million and $ i 1.9 million between Grown products and Prepared products were eliminated.
Sales to customers outside the U.S. were approximately $ i 6.1 million, and $ i 8.8 million for the three months ended July 31, 2022 and 2021. Sales to customers outside the U.S. were approximately $ i 21.5 million, and $ i 25.7 million for the nine months ended July 31, 2022 and 2021.
Our foreign operations in Mexico are subject to exchange rate fluctuations and foreign currency transaction costs. The functional currency of our foreign subsidiaries in Mexico is the United States dollar (U.S. dollar). As a result, monetary assets and liabilities are translated into U.S. dollars at exchange rates as of the balance sheet date and non-monetary assets, liabilities and equity are translated at historical rates. Sales and expenses are translated using a weighted-average exchange rate for the period. Gains and losses resulting from those remeasurements and foreign currency transactions are recognized within cost of sales. We recognized foreign currency remeasurement losses in the current quarter. These losses were due primarily to certain long-term net peso receivables. Foreign currency remeasurement losses, net of gains, for the three months ended July 31, 2022 was $ i 0.4 million. Foreign currency remeasurement gains, net of losses, for the three months ended July 31, 2021 was $ i 0.6 million. Foreign currency remeasurement losses, net of gains, for the nine months ended July 31, 2022 was $ i 1.3 million. Foreign currency remeasurement gains, net of losses, for the nine months ended July 31, 2021 was $ i 1.2 million.
iThe net carrying value of long-lived assets attributed to geographic areas as of July 31, 2022 and October 31, 2021, are as follows (in thousands):
| | | | | | | | | |
|
| United States |
| Mexico |
| Consolidated | |||
| $ | i 78,087 | | $ | i 36,394 | | $ | i 114,481 | |
| $ | i 81,059 | | $ | i 37,221 | | $ | i 118,280 | |
10
3. | Inventories |
iInventories consist of the following (in thousands):
| | | | | | | |
| | July 31, | | | |||
| | 2022 | | 2021 | | ||
| | | | | | | |
Fresh fruit |
| $ | i 14,793 |
| $ | i 17,648 | |
Packing supplies and ingredients | |
| i 14,621 | |
| i 13,088 | |
Finished prepared foods | |
| i 6,659 | |
| i 10,021 | |
Total | | $ | i 36,073 | | $ | i 40,757 | |
Inventories are stated at the lower of cost or net realizable value. We periodically review the value of items in inventory and record any necessary write downs of inventory based on our assessment of market conditions. Inventory includes reserves of $ i 0.3 million and $ i 0.2 million in slow moving and obsolete packing supply inventory as of July 31, 2022 and October 31, 2021.
/
i4. | Related party transactions |
Board of Directors
Certain members of our Board of Directors market California avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers. For the three months ended July 31, 2022 and 2021, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $ i 5.7 million and $ i 10.4 million. For the nine months ended July 31, 2022 and 2021, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $ i 7.3 million and $ i 15.4 million. Amounts payable to these Board members were $ i 2.0 million as of July 31, 2022. We did i not have any amounts payable to these Board members as of October 31, 2021.
Limoneira
During the three months ended July 31, 2022 and 2021, we received $ i i 0.1 / million as dividend income from Limoneira Company (Limoneira). During the nine months ended July 31, 2022 and 2021, we received $ i 0.4 million and $ i 0.3 million as dividend income from Limoneira. In addition, we lease office space from Limoneira for our corporate office. We paid rent expense to Limoneira totaling $ i i 0.1 / million for the three months ended July 31, 2022 and 2021. We paid rent expense to Limoneira totaling $ i i 0.3 / million for the nine months ended July 31, 2022 and 2021. Harold Edwards, who resigned as a member of our Board of Directors in February 2022, is the Chief Executive Officer of Limoneira Company. As of July 31, 2022, we own approximately i 9% of Limoneira’s outstanding shares. In February 2022, Limoneira ended its marketing agreement with Calavo.
Agricola Don Memo, S.A. de C.V. (“Don Memo”)
Calavo and Agricola Belher (“Belher”) have an equal one-half ownership interest in Don Memo. Pursuant to a management service agreement, Belher, through its officers and employees, has day-to-day power and authority to manage the operations.
As of July 31, 2022, and October 31, 2021, we had an investment of $ i 3.5 million and $ i 4.3 million, representing Calavo’s i i 50 / % ownership in Don Memo, which was included as an investment in unconsolidated entities on our balance sheet. We make advances to Don Memo for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under our marketing program to Don Memo, net of our commission and aforementioned advances. For the three months ended July 31, 2022, we advanced an additional $ i 2.2 million of preseason advances to Don Memo. As of July 31, 2022 and October 31, 2021, we had outstanding advances of $ i 6.4 million and $ i 4.2 million to Don Memo. In October 2020, we entered into an infrastructure loan agreement with Don Memo for up to $ i 2.4 million secured by certain property and equipment of Don Memo. This infrastructure loan accrues interest at i 7.25%. In October 2020, we funded $ i 0.7 million related to this loan agreement, and we funded an
/11
additional $ i 0.7 million, and $ i 0.6 million in the first, and second quarters of fiscal 2021, for a total outstanding balance at July 31, 2022 of $ i 2.0 million ($ i 0.4 million is included in prepaids and other current assets and $ i 1.6 million in other assets). This infrastructure loan agreement will mature in fiscal 2024. During the three months ended July 31, 2022 and 2021, we incurred $ i 3.2 million and $ i 5.7 million of cost of sales to Don Memo pursuant to our purchase consignment agreement. During the nine months ended July 31, 2022 and 2021, we incurred $ i 7.1 million and $ i 9.6 million of cost of sales to Don Memo pursuant to our purchase consignment agreement.
Belher
We make advances to Belher for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under our marketing program to Belher, net of our commission and aforementioned advances. We had grower advances due from Belher totaling $ i 3.5 million and $ i 4.5 million as of July 31, 2022 and October 31, 2021, which are netted against the grower payable. In addition, we had infrastructure advances due from Belher of $ i i 0.9 / million as of July 31, 2022 and October 31, 2021. These infrastructure advances were recorded as a receivable in prepaid and other current assets as of July 31, 2022 and October 31, 2021. In July 2021, we made a bridge loan of $ i 3.5 million to Belher. This loan is secured by certain farmland in Mexico and accrues interest at i 10%. In the first quarter of fiscal 2022, this loan was amended to be due with installments of $ i 0.9 million on July 31, 2022, $ i 0.9 million on July 31, 2023 and $ i 1.7 million on July 31, 2024. As part of this amended loan agreement, we can withhold payments on both the infrastructure advances and the bridge loan through the netting against the grower payable due to Belher. For the three and nine months ended July 31, 2022, we withheld $ i 1.1 million from payments to Belher to offset the bridge loan repayments. The remaining bridge loan has been recorded as $ i 0.7 million in prepaid expenses and other current assets and $ i 1.7 million in other assets. During the three months ended July 31, 2022 and 2021, we incurred $ i 1.4 million and $ i 1.8 million of cost of sales to Belher pursuant to our purchase consignment agreement. During the nine months ended July 31, 2022 and 2021, we incurred $ i 19.0 million and $ i 16.3 million of cost of sales to Belher pursuant to our purchase consignment agreement.
Avocados de Jalisco, S.A.P.I. de C.V. (“Avocados de Jalisco”)
In August 2015, we entered into a Shareholder’s Agreement with various Mexican partners and created Avocados de Jalisco. Avocados de Jalisco is a Mexican corporation created to engage in procuring, packing and selling avocados. As of July 31, 2022, this entity was approximately i 83% owned by Calavo and was consolidated in our financial statements. Avocados de Jalisco built a packinghouse located in Jalisco, Mexico, which began operations in June of 2017. During the three months ended July 31, 2022 and 2021 we purchased approximately $ i 1.2 million and $ i 2.2 million of avocados from the partners of Avocados de Jalisco. During the nine months ended July 31, 2022 and 2021, we purchased approximately $ i 4.7 million and $ i 5.4 million of avocados from the partners of Avocados de Jalisco.
i5. | Other assets and Intangibles |
iOther assets consist of the following (in thousands):
| | | | | | | |
|
| July 31, |
| | |||
| | 2022 | | 2021 | | ||
Mexican IVA (i.e. value-added) taxes receivable (see note 11) | | $ | i 41,265 | | $ | i 37,493 | |
Infrastructure advances to Agricola Belher | |
| i 1,641 | |
| i 1,641 | |
Bridge loan to Agricola Belher | |
| i 1,700 | |
| — | |
Other | |
| i 815 | |
| i 1,366 | |
Total | | $ | i 45,421 | | $ | i 40,500 | |
/ /12
Intangible assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | ||||||||||||||||
|
| Weighted- |
| Gross |
| | |
| Net |
| Gross |
| | |
| Net | | ||||
| | Average | | Carrying | | Accum. | | Book | | Carrying | | Accum. | | Book | | ||||||
| | Useful Life | | Value | | Amortization | | Value | | Value | | Amortization | | Value | | ||||||
Customer list/relationships |
| i 7 years | | $ | i 17,340 | | $ | ( i 11,028) | | $ | i 6,312 | | $ | i 17,340 | | $ | ( i 9,989) | | $ | i 7,351 | |
Trade names |
| i 11 years | |
| i 4,060 | |
| ( i 3,070) | |
| i 990 | |
| i 4,060 | |
| ( i 2,980) | |
| i 1,080 | |
Trade secrets/recipes |
| i 9 years | |
| i 630 | |
| ( i 620) | |
| i 10 | |
| i 630 | |
| ( i 567) | |
| i 63 | |
Brand name intangibles |
| indefinite | |
| i 275 | |
| — | |
| i 275 | |
| i 275 | |
| — | |
| i 275 | |
Intangibles, net | | | | $ | i 22,305 | | $ | ( i 14,718) | | $ | i 7,587 | | $ | i 22,305 | | $ | ( i 13,536) | | $ | i 8,769 | |
We anticipate recording amortization expense of $ i 0.4 million for the remainder of fiscal 2022, $ i 1.5 million for fiscal year 2023, $ i 1.5 million for fiscal year 2024, $ i 1.5 million for fiscal year 2025, and $ i 2.4 million thereafter.
i6. | Stock-Based Compensation |
In April 2011, our shareholders approved the Calavo Growers, Inc. 2011 Management Incentive Plan (the “2011 Plan”). All directors, officers, employees and consultants (including prospective directors, officers, employees and consultants) of Calavo and its subsidiaries are eligible to receive awards under the 2011 Plan. Shares were issuable under the 2011 Plan through December 2020. On April 21, 2021, the shareholders of Calavo approved the Calavo Growers, Inc. 2020 Equity Incentive Plan (the “2020 Plan”). This is a i five-year plan with up to i 1,500,000 shares that are issuable pursuant to awards that may be made through December 9, 2025.
Restricted Stock Awards
On December 13, 2021, certain of our officers were granted a total of i 5,355 restricted shares. These shares have full voting rights and participate in dividends as if unrestricted. The closing price of our stock on such date was $ i 40.53. These shares vest over i two years, on an annual basis, beginning December 13, 2022. These shares were granted pursuant to our 2020 Plan. The total recognized stock-based compensation expense for these grants was less than $ i i 0.1 / million for the three and nine months ended July 31, 2022.
On January 3, 2022, all 10 of our current directors were granted i 2,814 restricted shares each (for a total of i 28,140 shares). These shares have full voting rights and participate in dividends as if unrestricted. The closing share price of our stock on such grant date was $ i 42.64. As of January 3, 2023, these shares will vest and become unrestricted subject to the continued service of the director. The total recognized stock-based compensation expense for these grants was $ i 0.3 million and $ i 0.7 million for the three and nine months ended July 31, 2022.
On January 20, 2022, one of our current directors was granted i 1,500 unrestricted shares as a component of her compensation for services rendered during the 2021 fiscal year. The closing share price of our stock on such grant date was $ i 41.73. The stock-based compensation expense for this grant was recognized in total upon grant and aggregated $ i 0.1 million for the nine months ended July 31, 2022.
On February 1, 2022, Brian Kocher, our new Chief Executive Officer, was granted i 28,993 restricted shares as part of his employment agreement. The closing share price of our stock on such grant date was $ i 41.39. These shares will vest over i three years on an annual basis, beginning February 1, 2023. The total recognized stock-based compensation expense for this grant was $ i 0.1 million for the three months ended July 31, 2022. The total recognized stock-based compensation expense for this grant was $ i 0.2 million for the nine months ended July 31, 2022.
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A combined summary of restricted stock award activity, related to our 2011 and 2020 Plans, is as follows (in thousands, except for per share amounts):
| | | | | | | | | |
|
| |
| Weighted-Average |
| Aggregate |
| ||
|
| Number of Shares |
| Grant Price |
| Intrinsic Value |
| ||
Outstanding at October 31, 2021 |
| i 43 | | $ | i 64.89 | | | | |
Vested |
| ( i 31) | | $ | i 45.44 | | | | |
Forfeited | | ( i 9) | | $ | i 37.67 | | | | |
Granted |
| i 64 | | $ | i 41.88 | | | | |
Outstanding at July 31, 2022 |
| i 67 | | $ | i 45.01 | | $ | i 2,672 | |
The total recognized stock-based compensation expense for restricted stock was $ i 0.4 million and $ i 0.6 million for the three months ended July 31, 2022 and 2021. The total recognized stock-based compensation expense for restricted stock was $ i 1.8 million and $ i 2.8 million for the nine months ended July 31, 2022 and 2021. Total unrecognized stock-based compensation expense totaled $ i 1.7 million as of July 31, 2022 and will be amortized through fiscal year 2024.
Restricted Stock Units (RSUs) and Performance Restricted Stock Units (PRSUs)
On April 1, 2022, we issued RSUs for officers and other members of management as part of our long-term incentive plan. The RSUs are time-based and vest annually in equal amounts over a i three-year period. The PRSUs are based on i three-year cumulative performance targets of net sales, adjusted EBITDA and return on invested capital and vest entirely at the third anniversary. We granted i 34,269 RSUs and i 34,269 PRSUs at a grant stock price of $ i 37.49. With the departure of our former Chief Financial Officer, i 4,014 shares each of RSUs and PRSUs were forfeited. Based on our current projections, we recognized approximately $ i i 0.3 / million of stock-based compensation for the three and nine months ended July 31, 2022. As of July 31, 2022, there was $ i 2.2 million of unrecognized stock-based compensation costs related to non-vested RSUs and PRSUs, which the Company expects to recognize over a weighted-average period of i 2.3 years. The total fair value of the restricted stock units at July 31, 2022, is approximately $ i 2.5 million.
In the third quarter of fiscal 2022, Shawn Munsell, our new Chief Financial Officer, and Danny Demas, our new SVP of Grown products were granted i 9,002 RSUs and i 3,533 RSUs, respectively, as part of their employment agreements. The closing share price of our stock on such grant dates were $ i 38.88 and $ i 42.46, respectively. These shares will vest over i three years on an annual basis, with the first third vesting on June 20, 2023, and July 11, 2023, respectively. The total recognized stock-based compensation expense for this grant was insignificant for the three and nine months ended July 31, 2022.
On August 16, 2022, Helen Kurtz, our new SVP of Prepared products, was granted i 6,778 RSUs as part of her employment agreement. The closing share price of our stock on such grant date was $ i 44.26. These shares will vest over i three years on an annual basis, with the first third vesting on August 16, 2023.
iA combined summary of RSU activity, related to our 2020 Plan, is as follows (in thousands, except for per share amounts):
| | | | | | | | |
|
| Number of Shares |
| Weighted-Average |
| Aggregate | ||
|
| Represented |
| Grant Price |
| Intrinsic Value | ||
Outstanding at April 30, 2022 |
| i 34 | | $ | i 37.49 | | | |
Forfeited | | ( i 4) | | $ | i 37.49 | | | |
Granted |
| i 13 | | $ | i 39.89 | | | |
Outstanding at July 31, 2022 |
| i 43 | | $ | i 38.18 | | $ | i 1,724 |
Stock Options
Stock options are granted with exercise prices of not less than the fair market value at grant date, generally vest over one to i five years and generally expire two to i five years after the vest date. We settle stock option exercises with newly issued shares of common stock.
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We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to vest. We measure the fair value of our stock-based compensation awards on the date of grant.
iA summary of stock option activity, related to our 2011 and 2020 Plans, is as follows (in thousands, except for weighted-average exercise price):
| | | | | | | | | |
|
| |
| Weighted-Average |
| Aggregate | | ||
| | | | Exercise | | Intrinsic | | ||
| | Number of Shares | | Price | | Value | | ||
Outstanding at October 31, 2021 |
| i 19 | | $ | i 42.89 | | | | |
Exercised |
| ( i 2) | | $ | i 23.48 | | | | |
Outstanding at July 31, 2022 |
| i 17 | | $ | i 47.62 | | $ | — | |
Exercisable at July 31, 2022 |
| i 12 | | $ | i 51.12 | | $ | — | |
At July 31, 2022, outstanding and exercisable stock options had a weighted-average remaining contractual term of i 2.7 years. The total recognized and unrecognized stock-based compensation expense was insignificant for the three and nine months ended July 31, 2022 and 2021.
i7. | Other events |
Dividend payment
On December 3, 2021, we paid a $ i 1.15 per share dividend in the aggregate amount of $ i 20.3 million to shareholders of record on November 12, 2021.
Litigation
From time to time, we are involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.
Mexico tax audits
We conduct business both domestically and internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in the normal course of business, we are subject to examination by taxing authorities, primarily in Mexico and the United States.
2011 Assessment
On June 16, 2021 Calavo reached a settlement agreement with the Ministry of Finance and Administration of the government of the State of Michoacan, Mexico (MFM) regarding a 2011 Assessment of approximately $ i 2.2 billion Mexican pesos related to income tax, flat rate business tax and value added tax. Calavo agreed to pay approximately $ i 47.8 million Mexican pesos (approximately $ i 2.4 million USD) as a full and final settlement of all taxes, fines, and penalties.
2013 Assessment
In January 2017, we received preliminary observations from the Servicio de Administracion Tributaria in Mexico (the “SAT”) related to an audit for fiscal year 2013 outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and IVA. We provided a written rebuttal to these preliminary observations during our second fiscal quarter of 2017. During the period from our third fiscal quarter of 2017 through our third fiscal quarter of 2018, we attempted to resolve our case with the SAT through the conclusive agreement submitted before PRODECON (Mexican Tax Ombudsman), having several working meetings attended by
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representatives of the SAT, Calavo de Mexico (CDM) and the PRODECON. However, we were unable to materially resolve our case with the SAT through the PRODECON process.
As a result, in July 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $ i 2.6 billion Mexican pesos (which includes annual adjustments for inflation, and equals approximately $ i 127.6 million USD at July 31, 2022) related to Income Tax, Flat Rate Business Tax, and value added tax, related to this fiscal 2013 tax audit. This amount has been adjusted for inflation as of July 31, 2022 to the amount of $ i 3.08 billion Mexican pesos (approx. $ i 151.1 million USD). Additionally, the tax authorities have determined that we owe our employees profit-sharing liability, totaling approximately $ i 118 million Mexican pesos (approx. $ i 5.8 million USD at July 31, 2022). In August 2018, we filed an Administrative Appeal on the 2013 Assessment, appealing our case to the SAT’s central legal department in Michoacan.
On June 25, 2021, we became aware that the Administrative Appeal had been resolved by the SAT against CDM on March 12, 2021, and that we had allegedly failed to timely respond to and challenge the SAT’s notification of such resolution, therefore rendering the 2013 Assessment as definitive. Consequently, the SAT placed liens on the fixed assets of CDM, with a net book value of approximately $ i 26 million USD, and on bank accounts of CDM totaling approximately $ i 1 million USD in order to guaranty the 2013 Assessment. Based on legal counsel from our tax advisory firm, we and our tax advisory firm have concluded that the March notification was not legally communicated.
On August 18, 2021, we filed an Administrative Reconsideration (the Reconsideration) before the Central Legal Department of the SAT located in Mexico City, asserting that the resolution in March of the Administrative Appeal was wrongly concluded, in particular with respect to the following matters:
| o | Failure to recognize CDM as a “maquiladora” |
| o | Considering the Company to have a permanent establishment in Mexico, |
| o | Including fruit purchase deposits transferred by the Company to CDM as taxable, |
| o | Application of 16% IVA tax to fruit purchase deposits; and |
| o | Imposing double-taxation on the fruit purchase transactions |
On August 20, 2021 we filed an Annulment Suit (the Annulment Suit) with the Federal Tax Court, which among other things, strongly contends that the notifications made by the SAT to CDM and its designated advisors of the resolution of the Administrative Appeal in March 2021 were not legally communicated. In addition, the Annulment Suit asserts the same matters central to the Reconsideration, as described above, as wrongly concluded in the resolution of the Administrative Appeal.
On August 27, 2021, we filed a formal complaint, or queja, (the “Complaint”) before the PRODECON to request its assistance with having the SAT act upon the Reconsideration. The Complaint was withdrawn in September, but may still be reinstated if deemed appropriate in the future.
On September 22, 2021, we had an initial in-person meeting with the SAT in Mexico City to formally present and discuss the Reconsideration. The SAT agreed to review our Reconsideration in more detail; however, on January 3, 2022, the SAT formally rejected our request for the Reconsideration. In response to this rejection, on January 21, 2022, we filed an injunction suit with a federal district court seeking to nullify the arguments against the Reconsideration made by the SAT on constitutional grounds.
On February 4, 2022, we had a follow-up meeting with the SAT in Mexico City to begin a dialog with the objective of reaching a settlement of the 2013 Assessment. The SAT agreed in principle to continue this dialog, but requested that we provide a financial guaranty to secure the related tax as a pre-requisite to these discussions.
On February 25, 2022, we filed an additional injunction in which we seek to have the liens against the bank accounts of CDM lifted. The injunction suit has been accepted by the court and we are expecting a response in the next 2 - 3 months. The main purpose of the injunction suit was to challenge the SAT’s response issued to the Reconsideration, and with that, to keep the Reconsideration alive until the injunction suit is decided. This would allow time to continue the discussions with SAT at the administrative level and would give SAT the legal basis to issue a new resolution. This
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injunction suit represents a further opportunity for a Court of Law to analyze this matter from a constitutional perspective.
The injunction suit has been admitted for analysis by the District Court, however, SAT filed a complaint (queja) against the ruling allowing CDM to file an extension of the injunction suit aiming to appoint as a defendant other than SAT’s authority that were involved in the reconsideration appeal's resolution. This complaint was filed by SAT to challenge the admission and analysis of the injunction suit; this complaint is expected to be decided by the Circuit Courts within the next couple of months.
On March 4, 2022, the Annulment Suit was formally accepted by the Federal Tax Court, which simultaneously granted a provisional suspension of the collections proceedings by the SAT. The acceptance by the court of the Annulment Suit renders the 2013 Assessment as non-definitive, until such time as the suit is resolved.
On March 10, 2022, we met with the SAT and offered an Administrative Guaranty (Embargo en Via Administrativa) to secure the 2013 Assessment, which provides the SAT with certain administrative rights to CDM assets in the unlikely event we do not prevail in our actions through the Federal Tax Court (see below). Once the Administrative Guaranty is in place, the existing liens over the assets of CDM will be removed and the SAT collection process will be suspended.
On April 27, 2022, the SAT provided a Positive Compliance Opinion to CDM, and consequently on April 29, 2022, the Tax Authority renewed the VAT Certification to CDM. These two resolutions signal a positive development on the Tax controversies in Mexico.
On April 29, 2022, we submitted all the documentation required to the Tax Authority and the Federal Tax Court to continue with the consideration of the Administrative Guaranty.
On June 16, 2022 we received a request from the Tax Authorities to provide information related to the Administrative Guaranty. The information was presented on July 7, 2022, and on August 2, 2022. On August 8, 2022, we met with Tax Authorities in Mexico City to review the information presented and agreed to next steps on the approval of the Guarantee. Since then, the Tax Authorities have visited Calavo Mexico to continue the validation process and we believe will have a resolution in the next 2 - 3 months.
Once the Administrative Guaranty is ruled and accepted by the FTC and tax authority, they will permanently suspend and remove the liens on the fixed assets and bank accounts of CDM.
While we continue to believe that the 2013 Assessment is completely without merit, and that we will prevail on the Annulment Suit in the Tax Court, we also believe that it is in the best interest of CDM and the Company to settle the 2013 Assessment as quickly as possible. Furthermore, we believe that the above actions taken by CDM will encourage the SAT to agree to reach a settlement. In accordance with our cumulative probability analysis on uncertain tax positions, our recent settlements made by the SAT in other cases, the 2011 Assessment settlement reached by CDM with the MFM, and the value of CDM assets, we recorded a provision of $ i 11 million USD, in the third quarter of fiscal 2021, as a discrete item in Income Tax Provision. The provision includes estimated penalties, interest and inflationary adjustments. We believe that this provision remains appropriate as of July 31, 2022 based on or cumulative probability analysis. We incurred $ i 0.3 million and $ i 1.1 million of related professional fees for the three and nine months ended July 31, 2022, which have been recorded in Expenses related to Mexican Tax matters.
i8. | Fair value measurements |
A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).
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The following table sets forth our financial assets and liabilities as of July 31, 2022 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:
i | | | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | | ||||
| | (All amounts are presented in thousands) | | ||||||||||
Assets at Fair Value at July 31, 2022: | | | | | | | | | | | | | |
Investment in Limoneira Company(1) | | $ | i 21,251 |
| | — |
| | — | | $ | i 21,251 | |
Total assets at fair value | | $ | i 21,251 | | | — | | | — | | $ | i 21,251 | |
| | | | | | | | | | | | | |
Assets at Fair Value at October 31, 2021: | | | | | | | | | | | | | |
Investment in Limoneira Company(1) | | $ | i 27,055 |
| | — |
| | — | | $ | i 27,055 | |
Total assets at fair value | | $ | i 27,055 | | | — | | | — | | $ | i 27,055 | |
(1) The investment in Limoneira Company consists of marketable securities in the Limoneira Company common stock. We currently own approximately i i 9 / % of Limoneira’s outstanding common stock. These securities are measured at fair value using quoted market prices. For the three months ended July 31, 2022 and 2021, we recognized gains of $ i 1.2 million and losses of $ i 0.3 million, respectively, on the consolidated condensed statements of operations. For the nine months ended July 31, 2022 and 2021, we recognized losses of $ i 5.8 million and gains of $ i 6.8 million, respectively, on the consolidated condensed statement of operations.
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i9. | Noncontrolling interest |
iThe following table reconciles shareholders’ equity attributable to noncontrolling interest related to Avocados de Jalisco (in thousands).
| | | | | | | |
|
| Three months ended July 31, |
| ||||
Avocados de Jalisco noncontrolling interest |
| 2022 |
| 2021 | | ||
| | | |
| | | |
Noncontrolling interest, beginning | | $ | i 1,166 | | $ | i 1,385 | |
Net income attributable to noncontrolling interest of Avocados de Jalisco | |
| i 17 | |
| i 66 | |
Noncontrolling interest, ending | | $ | i 1,183 | | $ | i 1,451 | |
| | | | | | | |
| | Nine months ended July 31, | | ||||
Avocados de Jalisco noncontrolling interest |
| 2022 |
| 2021 | | ||
| | | |
| | | |
Noncontrolling interest, beginning | | $ | i 1,368 | | $ | i 1,472 | |
Net loss attributable to noncontrolling interest of Avocados de Jalisco | |
| ( i 185) | |
| ( i 21) | |
Noncontrolling interest, ending | | $ | i 1,183 | | $ | i 1,451 | |
/
i10. | Earnings per share |
iBasic and diluted net income per share is calculated as follows (data in thousands, except per share data):
| | | | | | | |
| | | Three months ended July 31, | | |||
|
| 2022 |
| 2021 | | ||
Numerator: | | | | | | | |
Net income (loss) attributable to Calavo Growers, Inc. | | $ | i 1,300 | | $ | ( i 12,981) | |
Denominator: | | | | | | | |
Weighted average shares – Basic | |
| i 17,667 | |
| i 17,630 | |
Effect of dilutive securities – Restricted stock/units/options (1) | |
| i 102 | |
| — | |
Weighted average shares – Diluted | |
| i 17,769 | |
| i 17,630 | |
Net income (loss) per share attributable to Calavo Growers, Inc: | | | | | | | |
Basic | | $ | i 0.07 | | $ | ( i 0.74) | |
Diluted | | $ | i 0.07 | | $ | ( i 0.74) | |
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| | | | | | |
| | Nine months ended July 31, | ||||
|
| 2022 |
| 2021 | ||
Numerator: | | | | | | |
Net Income (loss) attributable to Calavo Growers, Inc. | | $ | ( i 2,933) | | $ | i 1,137 |
Denominator: | | | | | | |
Weighted average shares - Basic | |
| i 17,661 | |
| i 17,616 |
Effect on dilutive securities – Restricted stock/units/options (1) | |
| — | |
| i 53 |
Weighted average shares - Diluted | |
| i 17,661 | |
| i 17,669 |
Net income (loss) per share attributable to Calavo Growers, Inc: | | | | | | |
Basic | | $ | ( i 0.17) | | $ | i 0.06 |
Diluted | | $ | ( i 0.17) | | $ | i 0.06 |
| (1) | For the nine months ended July 31 2022 approximately i 65,000 shares of common stock equivalents were excluded in the computation of diluted net loss per share, as the effect would be anti-dilutive since the Company reported a net loss. For the three months ended July 31, 2021 approximately i 52,000 share of common stock equivalents were excluded in the computation of dilated net loss per share, as the effect would be anti-dilutive since the Company reported a net loss. |
i11. | Mexican IVA taxes receivable |
Included in other assets are tax receivables due from the Mexican government for value-added taxes (“IVA”) paid in advance. CDM is charged IVA by vendors on certain expenditures in Mexico, which, insofar as they relate to the exportation of goods, translate into IVA amounts recoverable from the Mexican government.
As of July 31, 2022, and October 31, 2021, CDM IVA receivables totaled $ i 41.3 million ( i 840.9 million Mexican pesos) and $ i 37.5 million ( i 762.1 million Mexican pesos). Historically, CDM received IVA refund payments from the Mexican tax authorities on a timely basis. Beginning in fiscal 2014 and continuing into fiscal 2022, the tax authorities began objecting to refund requests and supporting documentation that had previously been deemed acceptable to process a refund. Additionally, they are also questioning the refunds requested attributable to IVA paid to certain suppliers that allegedly did not fulfill their own tax obligations. We believe these factors and others have contributed to delays in the processing of IVA claims by the Mexican tax authorities. Currently, we are in the process of collecting such balances primarily through regular administrative processes, but these amounts may ultimately need to be recovered through Administrative Appeals and/or other legal means.
During the first quarter of fiscal 2017, the tax authorities informed us that their internal opinion, based on the information provided by the local SAT office, considers that CDM is not properly documented relative to its declared tax structure and therefore CDM cannot claim the refundable IVA balance. CDM has strong arguments and supporting documentation to sustain its declared tax structure for IVA and income tax purposes. CDM started an Administrative Appeal for the IVA related to the request of the months of July, August and September of 2015 (the “2015 Appeal”) in order to assert its argument that CDM is properly documented and to therefore change the SAT’s internal assessment. In August 2018, we received a favorable ruling from the SAT’s Legal Administration in Michoacan on the 2015 Appeal indicating that they believe CDM’s legal interpretation of its declared tax structure is indeed accurate. While favorable on this central matter of CDM’s declared tax structure, the ruling, however, still does not recognize the taxpayers right to a full refund for the IVA related to the months of July, August and September 2015. Therefore, in October 2018, CDM filed a substance-over-form Annulment Suit in the Federal Tax Court to recover its full refund for IVA over the subject period, which is currently pending resolution.
In April 2022, the Tax Court issued the ruling for the months of July, August and September 2015 through which it was declared that the following resolutions were resolved:
| ● | It is recognized that CDM operates as a maquila under the authorization of the Ministry of Finance. |
| ● | It is recognized that all bank deposits corresponding to the purchase of avocados on behalf of Calavo Growers Inc. (CGI), are subject to the maquila program and it is not accruable income for purposes of Income Tax nor activities subject to VAT. |
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| ● | It is recognized that VAT is recoverable, since CDM demonstrated the existence of operations carried under the maquila services. |
| ● | Resolved that certain VAT amounts attributed to the purchase of certain packing materials are not recoverable as CDM was not the buyer on record and therefore did not pay for the materials, which approximated $ i 6.9 million pesos (approximately $ i 0.3 million USD). |
The court is still reviewing the appeal filed by the Company on May 9, 2022, against the ruling resolving that certain VAT amounts are not recoverable.
The latest court resolution sustains the Company’s position that it is entitled to substantially all of its VAT amounts, and the Company is considering its options for collecting the entire VAT receivable. In the unlikely event of an unfavorable resolution of the Administrative Appeals, we plan to file Annulment Suits with the Mexican Federal Tax Court. If these suits result in an unfavorable ruling, there is an option to appeal to the Collegiate Circuit Court. The estimated time for the resolution of these suits could be 2 – i 3 years.
We believe that our operations in Mexico are properly documented, and our internationally recognized tax advisors believe that there are legal grounds to prevail in collecting the corresponding IVA amounts. With assistance from our internationally recognized tax advisory firm, as of July 31, 2022, CDM has filed Administrative Appeals for months for which IVA refunds have been denied by the SAT, and will continue filing such appeals for any months for which refunds are denied in the future. Therefore, it is probable that the Mexican tax authorities will ultimately authorize the refund of the corresponding IVA amounts.
i12. Credit Facility
On December 1, 2021, we entered into the Fourth and Fifth Amendments to the Credit Agreement with Bank of America, N.A., as administrative agent (“Bank of America”), and Farm Credit West, PCA (together with Bank of America, the “Lenders”), relating to our Credit Agreement dated as of June 14, 2016, The Fourth and Fifth Amendments, among other terms, included CDM as a guarantor, increased the interest rate by i 0.5% and amended the financial covenant requirements as follows:
| ● | The Fixed Charge Coverage Ratio (FCCR) covenant was waived for the quarters ended October 31, 2021, January 31, 2022 and April 30, 2022. The covenant was resumed for the quarter ended July 31, 2022. |
| ● | The quarterly FCCR covenant was replaced by a cumulative monthly minimum Consolidated EBITDA covenant, with the first measurement occurring as of January 31, 2022 for the three months then ended, and continuing monthly thereafter through June 2022. |
| ● | Consolidated financial statements must be submitted monthly for the month and year-to-date period, beginning with the financial statements for the month of November 2021 and continuing through June 2022. |
The Company also pledged the i 1,677,299 shares it holds of Limoneira stock as collateral (which was in addition to the general business assets of the Company that already secure the credit facility).
The above terms and conditions will remain in effect until such time as the Company has certified compliance with a i 1.15 to 1.0 minimum FCCR for two consecutive fiscal quarters.
As of January 31, 2022, the Company was not in compliance with the cumulative monthly minimum Consolidated EBITDA covenant, and the Consolidated Leverage Ratio (CLR) covenant. In March 2022, the Company and the Lenders entered into the Sixth Amendment, Limited Waiver, and Limited Consent to Credit Agreement (the “Sixth
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Amendment”). The Sixth Amendment, among other terms, waived the non-compliance of the financial covenants as of January 31, 2022 and amended the financial covenant requirements as follows:
| ● | The cumulative monthly minimum Consolidated EBITDA testing has been waived and the CLR covenant testing is waived through July 31, 2022. |
| ● | Minimum Consolidated EBITDA of $ i 3 million, $ i 3 million and $ i 5 million for the months of February, March and April 2022 will be required. |
| ● | Monthly cumulative FCCR of i 1.20 starting with the quarter ended April 30, 2022, converting to trailing 12 months calculation starting as of October 31, 2022 and quarterly thereafter. For April through September 2022, dividends paid in December 2021 are included on a pro-rata basis. |
The interest rate of the facility increased to BSBY plus i 3.0%, until the first business day of the month after we certify that no default or event of default exists for the period ended July 31, 2022, at which point the interest rate will range between BSBY plus i 1.25 – i 1.75% based on our CLR. The total facility reduced from $ i 100 million to $ i 80 million and will be limited to a borrowing base consisting of the sum of eligible accounts receivable (80%), eligible US inventory (50%), and Limoneira shares (60%), less grower payables.
As of July 31, 2022, we were in compliance with the financial covenants, and we expect to remain in compliance through September 2023. As of July 31, 2022, approximately $ i 16.8 million was available for borrowing, based on our borrowing base calculation discussed above.
i13. COVID-19 Pandemic Impact
The COVID-19 pandemic has created challenging and unprecedented conditions for our business, and we are committed to taking action in support of a Company-wide response to the crisis. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, changed certain purchasing norms in retail and foodservice channels and created significant volatility and disruption of financial markets. This has resulted in inflationary and cost pressures that have significantly increased, and continue to adversely impact, our production and distribution costs, including costs of raw materials, packaging, labor, and freight. We are also experiencing pressure in our supply chain due to strained transportation capacity and lack of sufficient labor availability. We believe, however, that we are well-positioned for the future as we continue to navigate the crisis and have successfully implemented contingency plans in the U.S. and in Mexico to monitor the evolving needs of our businesses, as well as those related to our Peru partner in consignment avocado sales.
The effects of the pandemic have been more pronounced in the portions of our business servicing foodservice customers and to a lesser extent certain segments of our retail business, including behind-the-glass deli and grab-and-go convenience items.
While many restrictions have since been lifted, the pace of the recovery from the COVID-19 pandemic is not presently known. Additionally, we cannot forecast future variants or the impact on our business of such variants, if any. We cannot reasonably estimate the duration or extent of the pandemic’s adverse impact on our business, operating results, and long-term liquidity position.
i14. Closure of Florida facility
On November 15, 2021, Prepared’s Green Cove Springs, Florida facility ceased operations. The Company’s Grown avocado operations at this facility will continue and are not affected. Prepared will continue to serve customers of this location from its other food processing locations, primarily in Georgia.
The closure resulted in a reduction of i 140 employees, impairment of leasehold improvements, writedowns of inventory and other assets, and certain cash expenditures for the relocation of machinery and equipment and the closure of the leased facilities. During the fourth quarter of fiscal 2021, we wrote down $ i 8.7 million of leasehold improvements, $ i 0.1 million of equipment, and $ i 0.6 million of inventory (recognized through cost of goods sold). We also paid $ i 0.4 million in employee severance. The impairment related to the Prepared Florida closure has been recorded on the
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consolidated statement of operations under “Impairment and charges related to Florida facility closure”. There were i i no / impairments charges related to the Prepared Florida facility closure during the three and nine months ended July 31, 2022.
As of July 31, 2022 and October 31, 2021, the Company had right of use assets with a net book value of $ i 4.1 million and $ i 4.8 million respectively, and lease liabilities of $ i 5.3 million and $ i 6.0 million, respectively, recorded on the balance sheet related to the closed facility. The facility lease has a maturity date of October 31, 2031. The Company intends to seek a sub-lease tenant to assume the vacated space, and believes such a sub-lease can be obtained at a lease rate, and for a lease period, sufficient to realize the right of use asset. Management will continue to evaluate the actual amounts and duration of expected future sub-lease revenues. Should the actual sub-lease revenues be less than those currently expected, the Company may need to record impairment of some or all its investment in the right of use asset.
During the nine months ended July 31, 2022, we incurred $ i 1.0 million of incremental restructuring and related costs due to the transition to other facilities.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the fiscal year ended October 31, 2021 of Calavo Growers, Inc. (“we”, “Calavo”, or the “Company”).
Recent Developments
Change in Reporting Segments
On April 13, 2022, we issued a press release announcing our plans to reorganize the business into two reporting segments, Grown and Prepared. The management transition to operate as Grown and Prepared began at the start of the third quarter of 2022. The Grown segment consists of fresh avocados, tomatoes and papayas. The Prepared segment comprises all other products including fresh cut fruits and vegetables, ready-to-eat sandwiches, wraps, salads and snacks, guacamole, and salsa sold at retail and food-service as well as avocado pulp sold to foodservice. These two business segments are presented based on how information is used by our Chief Executive Officer (as our chief operating decision maker) to measure performance and allocate resources. Selling, general and administrative expenses, as well as other non-operating income/expense items, are evaluated by our Chief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them, to our operating segments. Prior year information has been recast to conform with the new segment presentation.
COVID-19 Pandemic Impact
The COVID-19 pandemic has created challenging and unprecedented conditions for our business, and we are committed to taking action in support of a Company-wide response to the crisis. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, changed certain purchasing norms in retail and foodservice channels and created significant volatility and disruption of financial markets. This has resulted in inflationary and cost pressures that have significantly increased, and continue to adversely impact, our production and distribution costs, including costs of raw materials, packaging, labor, and freight. We are also experiencing pressure in our supply chain due to strained transportation capacity and lack of sufficient labor availability. We believe that we are well-positioned for the future as we continue to navigate the crisis and have successfully implemented contingency plans in the U.S. and in Mexico to monitor the evolving needs of our businesses in those countries, as well as those related to our Peru partner in consignment avocado sales.
The effects of the pandemic have been more pronounced in the portions of our business servicing foodservice customers and to a lesser extent certain segments of our retail business, including behind-the-glass deli and grab-and-go convenience items.
While many of such restrictions have since been lifted, the pace of the recovery from the COVID-19 pandemic is not presently known. Additionally, we cannot forecast future variants or the impact on our business of such variants, if any. We cannot reasonably estimate the duration or extent of the pandemic’s adverse impact on our business, operating results, and long-term liquidity position.
COVID-19 Recovery Economic Impact
The recovery from the COVID-19 pandemic and the current economic climate is increasing labor costs, commodity costs and logistical costs. We are experiencing operational challenges that impact our production facilities and our logistics network; the impact of prices for petroleum-based products, packaging materials and commodity costs; and the availability of sufficient labor is increasing costs company-wide.
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In response to the inflationary costs described above, we notified customers of our plans to institute price increases for our Prepared products. Management believes the price increases will largely be accepted by our customers without significant loss of sales, will reverse the margin compression experienced by Prepared segment during the pandemic, and will enable us to continue to invest in initiatives that drive growth.
Dividend payment
On December 3, 2021, we paid a $1.15 per share dividend in the aggregate amount of $20.3 million to shareholders of record on November 12, 2021.
Litigation
From time to time, we are involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.
Project Uno
During the third quarter of 2021, the Company launched Project Uno, a strategic set of initiatives that seeks to identify areas of operating efficiencies and cost savings to expand profit margins, cash flow and return on invested capital. We have undertaken multiple productivity and transformation initiatives, including (1) closure of the Prepared Florida plant and transfer of its viable operations into Prepared Georgia, (2) implementing broader supply chain operational improvements, (3) integrating our commercial, logistics, IT, procurement and accounting functions across the three divisions, (4) product rationalization initiatives which are aimed at eliminating unprofitable or slow moving SKUs and (5) outsourcing certain functions in our North American business to third-party service providers and the associated implementation of new procurement technology solutions. The Company continues to carry out the existing productivity initiatives as well as additional initiatives under this strategy.
Mexico tax audits
In January 2017, we received preliminary observations from the Servicio de Administracion Tributaria in Mexico (the “SAT”) related to an audit for fiscal year 2013 outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and IVA. We provided a written rebuttal to these preliminary observations during our second fiscal quarter of 2017.
On February 4, 2022, we had a follow-up meeting with the SAT in Mexico City to begin a dialog with the objective of reaching a settlement of the 2013 Assessment. The SAT agreed in principle to continue this dialog, but requested that we provide a financial guaranty to secure the related tax as a pre-requisite to these discussions.
On February 25, 2022, we filed an additional injunction in which we seek to have the liens against the bank accounts of CDM lifted. The injunction suit has been accepted by the court and we are expecting a response within the next 2 - 3 months. The main purpose of the injunction suit was to challenge the SAT’s response issued to the Reconsideration, and with that, to keep the Reconsideration alive until the injunction suit is decided. This would allow time to continue the discussions with SAT at the administrative level and would give SAT the legal basis to issue a new resolution. This injunction suit represents a further opportunity for a Court of Law to analyze this matter from a constitutional perspective.
The injunction suit has been admitted for analysis by the District Court, however, SAT filed a complaint (queja) against the ruling allowing CDM to file an extension of the injunction suit aiming to appoint as a defendant other than SAT’s authority that were involved in the reconsideration appeal's resolution. This complaint was filed by SAT to challenge the admission and analysis of the injunction suit; this complaint is expected to be decided by the Circuit Courts within the next couple of months.
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On March 4, 2022, the Annulment Suit was formally accepted by the Federal Tax Court, which simultaneously granted a provisional suspension of the collections proceedings by the SAT. The acceptance by the court of the Annulment Suit renders the 2013 Assessment as non-definitive, until such time as the suit is resolved.
On March 10, 2022, we met with the SAT and offered an Administrative Guaranty (Embargo en Via Administrativa) to secure the 2013 Assessment, which provides the SAT with certain administrative rights to CDM assets in the unlikely event we do not prevail in our actions through the Federal Tax Court (see below). Once the Administrative Guaranty is in place, the existing liens over the assets of CDM will be removed and the SAT collection process will be suspended.
On April 27, 2022, the SAT provided a Positive Compliance Opinion to CDM, and consequently on April 29, 2022, the Tax Authority renewed the VAT Certification to CDM. These two resolutions signal a positive development on the Tax controversies in Mexico.
On April 29, 2022, we submitted all the documentation required to the Tax Authority and the Federal Tax Court to continue with the consideration of the Administrative Guaranty.
On June 16, 2022 we received a request from the Tax Authorities to provide information related to the Administrative Guaranty. The information was presented on July 7, 2022, and on August 2, 2022. On August 8, 2022, we met with Tax Authorities in Mexico City to review the information presented and agreed to next steps on the approval of the Guarantee. Since then, the Tax Authorities have visited Calavo Mexico to continue the validation process and we believe will have a resolution in the next 2 - 3 months.
Once the Administrative Guaranty is ruled and accepted by the FTC and tax authority, they will permanently suspend and remove the liens on the fixed assets and bank accounts of CDM.
While we continue to believe that the 2013 Assessment is completely without merit, and that we will prevail on the Annulment Suit in the Tax Court, we also believe it is in the best interest of CDM and the Company to settle the 2013 Assessment as quickly as possible. Furthermore, we believe that the above actions taken by CDM will encourage the SAT to agree to reach a settlement. In accordance with our cumulative probability analysis, based on factors such as recent settlements made by the SAT in other cases, the 2011 Assessment settlement reached by CDM with the MFM, and the value of CDM assets, we recorded a provision of $11 million USD, in the third quarter of fiscal 2021, as a discrete item in Income Tax Provision. The provision includes estimated penalties, interest and inflationary adjustments. We believe that this provision remains appropriate as of July 31, 2022 based on or cumulative probability analysis. We incurred $0.3 million and $1.1 million of related professional fees for the three and nine months ended July 31, 2022, which have been recorded in Expenses related to Mexican Tax matters.
Mexican IVA taxes receivable
Historically, CDM received IVA refund payments from the Mexican tax authorities on a timely basis. Beginning in fiscal 2014 and continuing into fiscal 2022, the tax authorities began objecting to refund requests and supporting documentation that had previously been deemed acceptable to process a refund. Additionally, they are also questioning the refunds requested attributable to IVA paid to certain suppliers that allegedly did not fulfill their own tax obligations. We believe these factors and others have contributed to delays in the processing of IVA claims by the Mexican tax authorities. Currently, we are in the process of collecting such balances primarily through regular administrative processes, but these amounts may ultimately need to be recovered through Administrative Appeals and/or legal means.
In April 2022, the Tax Court issued the ruling for the months of July, August and September 2015 through which it was declared that the following resolutions were resolved:
| ● | It is recognized that CDM operates as a maquila under the authorization of the Ministry of Finance. |
| ● | It is recognized that all bank deposits corresponding to the purchase of avocados on behalf of Calavo Growers Inc. (CGI), are subject to the maquila program and it is not accruable income for purposes of Income Tax nor activities subject to VAT. |
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| ● | It is recognized that VAT is recoverable, since CDM demonstrated the existence of operations carried under the maquila services. |
| ● | Resolved that certain VAT amounts attributed to the purchase of certain packing materials are not recoverable as CDM was not the buyer on record and therefore did not pay for the materials, which approximated $6.9 million pesos (approximately $0.3 million USD). |
The court is still reviewing the appeal filed by the Company on May 9, 2022, against the ruling resolving that certain VAT amounts are not recoverable.
The latest court resolution sustains the Company’s position that it is entitled to substantially all of its VAT amounts, and the Company is considering its options for collecting the entire VAT receivable. In the unlikely event of an unfavorable resolution of the Administrative Appeals, we plan to file Annulment Suits with the Mexican Federal Tax Court. If these suits result in an unfavorable ruling, there is an option to appeal to the Collegiate Circuit Court. The estimated time for the resolution of these suits could be 2 – 3 years.
We believe that our operations in Mexico are properly documented, and our internationally recognized tax advisors believe that there are legal grounds to prevail in collecting the corresponding IVA amounts. With assistance from our internationally recognized tax advisory firm, as of July 31, 2022, CDM has filed Administrative Appeals for months for which IVA refunds have been denied by the SAT, and will continue filing such appeals for any months for which refunds are denied in the future. Therefore, it is probable that the Mexican tax authorities will ultimately authorize the refund of the corresponding IVA amounts.
Closure of Florida facility
On November 15, 2021, Prepared's Green Cove Springs, Florida facility ceased operations. Our Grown avocado operations at this facility will continue in operation and are not affected. Prepared will continue to serve customers of this location from our other food processing locations, primarily in Georgia.
The closure resulted in a reduction of 140 employees, impairment of leasehold improvements, writedowns of inventory and other assets, and certain cash expenditures for the relocation of machinery and equipment and the closure of the leased facilities. During the fourth quarter of fiscal 2021, we wrote down $8.7 million of leasehold improvements, $0.1 million of equipment, and $0.6 million of inventory (recognized through cost of goods sold). We also paid $0.4 million in employee severance. The impairment related to the Florida closure has been recorded on the consolidated statement of operations under “Impairment and charges related to Florida facility closure”. There were no impairments charges related to the Prepared Florida facility closure during the three and nine months ended July 31, 2022.
As of July 31, 2022 and October 31, 2021, we had right of use assets with a net book value of $4.1 million and $4.8 million respectively, and lease liabilities of $5.3 million and $6.0 million, respectively, recorded on the balance sheet related to the closed facility. The facility lease has a maturity date of October 31, 2031. We intend to seek a sub-lease tenant to assume the vacated space, and we believe such a sub-lease can be obtained at a lease rate and for a lease period sufficient to realize the right of use asset. We will continue to evaluate the actual amounts and duration of expected future sub-lease revenues. Should the actual sub-lease revenues be less than those currently expected, we may need to record impairment of some or all of our investment in the right of use asset.
During the nine months ended July 31, 2022, we incurred $1.0 million of incremental restructuring and related costs due to the transition to other facilities.
Critical Accounting Estimates
In preparing our financial statements in accordance with GAAP, we are required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, and costs and expenses that are reported in the financial statements and accompanying disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based
26
on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates and assumptions. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
Other than the change in operating segment realignment described below, there have been no material changes in our critical accounting estimates during the three and nine months ended July 31, 2022, as compared to those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for our fiscal year ended October 31, 2021.
As a result of the Company's operating segment realignment, the composition of its reporting units for the evaluation of goodwill impairment was changed. RFG reporting unit goodwill is now included within the Prepared reporting unit. Therefore, the goodwill of $24.7 million, which was previously recorded within the RFG reporting unit, is now within Prepared and $4.0 million in Grown remained unchanged. Prior to the change in its reporting unit, the Company tested goodwill for impairment at the previous reporting unit, which did not result in any impairment charge.
Non-GAAP Financial Measures
The below tables include non-GAAP measures EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted EPS, which are not prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.”
EBITDA is defined as net income (loss) attributable to Calavo Growers, Inc. excluding (1) interest income and expense, (2) income taxes (benefit) provision, (3) depreciation and amortization and (4) stock-based compensation expense. Adjusted EBITDA is EBITDA with further adjustments for (1) non-cash net losses recognized from unconsolidated entities, (2) goodwill impairment, (3) write-off of long-lived assets, (4) acquisition-related costs, (5) restructuring-related costs, including certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted EBITDA is a primary metric by which management evaluates the operating performance of the business, on which certain operating expenditures and internal budgets are based and by which, in addition to other factors, the Company’s senior management is compensated. The adjustments to calculate EBITDA and adjusted EBITDA are items recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded.
Adjusted net income is defined as net income (loss) attributable to Calavo Growers, Inc. excluding (1) non-cash net losses recognized from unconsolidated entities, (2) goodwill impairment, (3) write-off of long-lived assets, (4) acquisition-related costs, (5) restructuring-related costs, including certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted net income and the related measure of adjusted diluted EPS exclude certain items that are recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income affords investors a different view of the overall financial performance of the Company than adjusted EBITDA and the GAAP measure of net income (loss) attributable to Calavo Growers, Inc.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the financial tables below.
Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. One-time items are identified in the notes to the reconciliations in the financial tables below.
Non-GAAP information should be considered as supplemental in nature and not as a substitute for, or superior to, any measure of performance prepared in accordance with GAAP. None of these metrics are presented as measures of liquidity. The way the Company measures EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted EPS may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in Company agreements.
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Adjusted Net Income (Non-GAAP, Unaudited)
The following table presents adjusted net income and adjusted diluted EPS, each a non-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., and diluted EPS, which are the most directly comparable GAAP measures. See “Non-GAAP Financial Measures” above (in thousands, except per share amounts).
| | | | | | | | | | | | |
| | Three months ended July 31, |
| Nine month ended July 31, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income (loss) attributable to Calavo Growers, Inc. | | $ | 1,300 | | $ | (12,981) | | $ | (2,933) | | $ | 1,137 |
Non-GAAP adjustments: | |
|
| |
|
| |
|
| |
|
|
Non-cash losses recognized from unconsolidated entities (a) | |
| 269 | |
| 469 | |
| 812 | |
| 1,755 |
Recovery from FreshRealm and other related expenses (b) | |
| 580 | |
| (6,000) | |
| 580 | |
| (5,989) |
Acquisition costs (c) | |
| — | |
| — | |
| — | |
| 262 |
Net (gain) loss on Limoneira shares (d) | |
| (1,225) | |
| 252 | |
| 5,803 | |
| (6,843) |
Rent expense add back (e) | |
| 108 | |
| 108 | |
| 324 | |
| 324 |
Restructure costs - consulting, management recruiting and severance (f) | | | 1,198 | | | 125 | | | 4,473 | | | 810 |
Mexican tax matters (g) | | | 789 | | | 13,815 | | | 1,634 | | | 13,815 |
Impairment and charges related to closure of Florida facility (h) | | | — | | | — | | | 959 | | | — |
Tax impact of adjustments (i) | |
| (163) | |
| 1,168 | |
| (3,380) | |
| 2,332 |
Adjusted net income (loss) attributed to Calavo Growers, Inc. | | $ | 2,856 | | $ | (3,044) | | $ | 8,272 | | $ | 7,603 |
| | | | | | | | | | | | |
Calavo Growers, Inc.’s net income (loss) per share: | |
|
| |
|
| |
|
| |
|
|
Diluted EPS (GAAP) | | $ | 0.07 | | $ | (0.74) | | $ | (0.17) | | $ | 0.06 |
Adjusted Diluted EPS | | $ | 0.16 | | $ | (0.17) | | $ | 0.47 | | $ | 0.43 |
| | | | | | | | | | | | |
Number of shares used in per share computation: | |
|
| |
|
| |
|
| |
|
|
Diluted | |
| 17,769 | |
| 17,630 | |
| 17,726 | |
| 17,669 |
| (a) | For the three months ended July 31, 2022 and 2021, we realized losses from Agricola Don Memo totaling $0.3 million and $0.5 million. For the nine months ended July 31, 2022 and 2021, we realized losses from Agricola Don Memo totaling less than $0.8 million and $1.8 million. |
| (b) | In July 2021, as part of the FreshRealm Separation Agreement, FreshRealm paid Calavo the Loan Payoff Amount of $6.0 million, and we recorded the receipt on the statement of operations as a recovery of the reserve for collectability of the FreshRealm note receivable. For the three and nine months ended July 31, 2022, we recognized a return to provision discrete tax expense of $0.6 million due to the finalization of the tax treatment of the loss related to the previously recorded impairment of the investment in FreshRealm. |
| (c) | For the nine months ended July 31, 2021, we incurred professional service costs related to a considered but non-consummated acquisition. |
| (d) | For the three months ended July 31, 2022 and 2021, we recorded $1.2 million in unrealized gains and $0.3 million in unrealized losses related to these mark-to-market adjustments, respectively. For the nine months ended July 31, 2022 and 2021, we recorded $5.8 million in unrealized losses and $6.8 million in unrealized gains related to these mark-to-market adjustments, respectively. |
| (e) | For the three months ended July 31, 2022 and 2021, we incurred $0.1 million related to rent paid for Prepared’s former corporate office space that we have vacated and plan to sublease. For the nine months ended July 31, 2022 and 2021, we incurred $0.3 million related to rent paid for this same office space. |
| (f) | For the three and nine months ended July 31, 2022, we recorded $1.2 million and $4.5 million of consulting expenses related to an enterprise-wide strategic business review conducted for the purpose of restructuring to improve the profitability of the organization and efficiency of our operations. In addition, for the nine months ended July 31, 2022, we recorded $1.4 million of severance accrual related to the restructuring. For the nine months ended July 31, 2021, we recorded higher stock-based compensation for the early vesting of restricted stock for the retirement of our former Chief Executive Officer and Board member. |
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| (g) | For the three and nine months ended July 31, 2022, we incurred $0.3 million and $1.1 million of professional fees related to the Mexican tax matters. For the three and nine months ended July 31, 2022, we recognized a return to provision discrete tax expense of $0.5 million due to the finalization of the tax treatment for the final settlement of the 2011 Assessment (see below). See Note 7 to the consolidated condensed financial statements included in this Quarterly Report for further information. |
In June 2021, we paid $2.4 million in full settlement of the 2011 Assessment. Of this amount, $1.5 million has been recorded as a discrete item in the Income Tax Provision and $0.9 million is related to Value Added Tax expense and recorded as expenses related to the Mexican tax matters. An additional $0.3 million of related professional fees have also been recorded as expenses related to the Mexican tax matters.
In July 2021, based on our evaluation of the most probable outcomes of the 2013 Assessment, we recorded an accrual of $11 million in the financial statements as a discrete item in Income Tax Provision. An additional $0.1 million of related professional fees have also been recorded as expenses related to the Mexican tax matters.
| (h) | On October 18, 2021, we announced the closure of RFG’s (Prepared’s) food processing operations at our Green Cove Springs (near Jacksonville), Florida facility, as part of our Project Uno profit improvement program. As of November 15, Prepared’s Green Cove Springs facility has ceased operations. We incurred $1.0 million of expenses for the nine months ended July 31, 2022, related to the closure of this facility. |
| (i) | Tax impact of non-GAAP adjustments are based on effective year-to-date tax rates. |
Reconciliation of EBITDA and Adjusted EBITDA (Non-GAAP, Unaudited)
The following table presents EBITDA and adjusted EBITDA, each a non-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., which is the most directly comparable GAAP measure. See “Non-GAAP Financial Measures” above (in thousands, except per share amounts).
| | | | | | | | | | | | |
|
| Three months ended July 31, |
| Nine months ended July 31, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income (loss) attributable to Calavo Growers, Inc. | | $ | 1,300 | | $ | (12,981) |
| $ | (2,933) | | $ | 1,137 |
Interest Income | | | (136) | | | 31 |
| | (402) | | | (58) |
Interest Expense |
| | 485 |
| | 208 | | | 1,272 |
| | 573 |
Provision for Income Taxes |
| | 984 |
| | 12,358 | | | (363) |
| | 17,073 |
Depreciation & Amortization |
| | 4,067 |
| | 4,554 | | | 12,472 |
| | 12,925 |
Stock-Based Compensation |
| | 754 |
| | 554 | | | 2,123 |
| | 2,818 |
EBITDA | | $ | 7,454 | | $ | 4,724 | | $ | 12,169 | | $ | 34,468 |
| | | | | | | | | | | | |
Adjustments: | |
|
| |
|
| |
|
| |
|
|
Non-cash losses recognized from unconsolidated entities (a) | |
| 269 | |
| 469 | |
| 812 | |
| 1,755 |
Net (gain) loss on Limoneira shares (d) | |
| (1,225) | |
| 252 | |
| 5,803 | |
| (6,843) |
Recovery from FreshRealm and other related expenses (b) | |
| — | |
| (6,000) | |
| — | |
| (5,989) |
Rent expense add back (e) | |
| 108 | |
| 108 | |
| 324 | |
| 324 |
Acquisition costs (c) | |
| — | |
| — | |
| — | |
| 262 |
Restructure costs - consulting and management recruiting and severance (f) | | | 1,198 | | | 125 | | | 4,335 | | | 125 |
Expenses related to Mexican tax matters (g) | | | 303 | | | 1,342 | | | 1,148 | | | 1,342 |
Impairment and charges related to closure of Florida facility (h) | | | — | | | — | | | 929 | | | — |
Adjusted EBITDA | | $ | 8,107 | | $ | 1,020 | | $ | 25,520 | | $ | 25,444 |
Adjusted EBITDA per dilutive share | | $ | 0.46 | | $ | 0.06 | | $ | 1.44 | | $ | 1.44 |
See prior page for footnote references
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Net Sales
The following table summarizes our net sales by business segment for each of the three and nine months ended July 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| | Three months ended July 31, | | Nine months ended July 31, | | ||||||||||||
| | 2022 | | Change | | 2021 | | 2022 | | Change | | 2021 | | ||||
Gross sales: |
| |
|
|
|
| |
|
| |
|
|
|
| |
|
|
Grown | | $ | 207,589 | | 28 | % | $ | 161,580 | | $ | 581,171 | | 32 | % | $ | 438,725 | |
Prepared | |
| 134,872 | | 9 | % |
| 124,100 | |
| 367,889 | | 6 | % |
| 345,597 | |
Less intercompany eliminations | | | (470) | | (30) | % | | (672) | | | (1,559) | | (19) | % | | (1,915) | |
Total net sales | | $ | 341,991 | | 20 | % | $ | 285,008 | | $ | 947,501 | | 21 | % | $ | 782,407 | |
| | | | | | | | | | | | | | | | | |
As a percentage of sales: | | | | | | | | | | | | | | | | | |
Grown | |
| 60.6 | % | | |
| 56.6 | % |
| 61.2 | % | | |
| 55.9 | % |
Prepared | |
| 39.4 | % | | |
| 43.4 | % |
| 38.8 | % | | |
| 44.1 | % |
| |
| 100.0 | % | | |
| 100.0 | % |
| 100.0 | % | | |
| 100.0 | % |
Results of Operations
Summary
Net sales for the three months ended July 31, 2022, compared to the corresponding period in fiscal 2021, increased by $57.0 million, or approximately 20%. This increase was across both segments. Net sales for the nine months ended July 31, 2022, compared to the corresponding period in fiscal 2021, increased by $165.1 million, or approximately 21%. The increase was primarily due to our Grown products segment.
For the three and nine months ended July 31, 2022, the increase in Grown product sales was primarily due to an increase in price per unit of avocados offset by lower sales volume resulting from industry-wide constraints of fruit available for purchase in Mexico. For the three and nine months ended July 31, 2022, the increase in Prepared product sales was due primarily to increased per unit sales prices of fresh-cut fruit & vegetables and prepared foods products.
Our Grown and Prepared segments of our business are subject to seasonal trends which can impact the volume and/or quality of raw materials sourced in any particular quarter. All intercompany sales are eliminated in our consolidated results of operations.
As of the end of the third quarter of fiscal 2022, we have begun importing avocados into the United States from our subsidiary Avocados de Jalisco. We expect this volume to increase in the fourth quarter of fiscal 2022.
Grown products
Third Quarter 2022 vs. Third Quarter 2021
Net sales for the Grown products business increased by approximately $46.0 million, or 28%, for the third quarter of fiscal 2022 compared to the corresponding period in fiscal 2021. This increase in Grown product sales during the third quarter of fiscal 2022 was primarily related to increased sales prices of avocados due to lower overall supply of avocados in the marketplace. Partially offsetting this increase, tomato sales decreased due to a decrease in overall sales volume.
Sales of avocados increased $48.4 million, or 33%, for the third quarter of 2022 compared to the prior year period. The average avocado sales price per carton increased 63% compared to the prior year period. This increase in the sales price per carton was mainly due to an industry-wide decrease of supply of avocados in the marketplace. The volume of avocados sold in the third quarter of 2022 decreased 19% compared to the prior year period, which is slightly better than the decrease of avocados imported from Mexico into the United States for the same period.
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Sales of tomatoes decreased $2.4 million, or 21%, for the third quarter of 2022, when compared to the prior year period. This decrease in tomato sales was primarily due to a 24% decrease in the cartons sold of tomatoes.
Nine Months Ended July 31, 2022 vs. Nine Months Ended July 31, 2021
Net sales for the Grown products business increased by approximately $142.4 million, or 32%, for the nine months ended July 31, 2022, compared to the corresponding period in fiscal 2021. This increase in Grown product sales during the nine months ended July 31, 2022, was primarily related to increased sales prices of avocados associated with lower overall supply of avocados in the marketplace. In addition, tomato sales increased due to an increase in overall sales volume, partially offset by a decrease in sales prices.
Sales of avocados increased $140.2 million, or 35%, for the nine months ended July 31, 2022, compared to the prior year period. The average avocado sales price per carton increased 58% compared to the prior year period. This increase in the sales price per carton was mainly due to a decrease of supply of avocados in the marketplace. The volume of avocados sold in the nine months ended July 31, 2022, decreased 14% compared to the prior year period.
Sales of tomatoes increased $2.4 million, or 7%, for the nine months ended July 31, 2022, when compared to the prior year period. This increase in tomato sales was primarily due to a 9% increase in the cartons sold of tomatoes, partially offset by a 2% decrease in average sales prices per carton.
Prepared products
Third Quarter 2022 vs. Third Quarter 2021
Net sales for the Prepared products business increased by approximately $11.2 million, or 9%, for the three months ended July 31, 2022 compared to the corresponding period in fiscal 2021. This increase in Prepared product sales during the three months ended July 31, 2022 was primarily related to increased sales prices of fresh-cut fruit & vegetables and prepared foods products. Partially offsetting these increases was a decrease in sales of prepared avocado products due to overall lower sales volume, offset by higher sales prices.
Net sales for fresh-cut fruit & vegetables and prepared foods products increased $13.0 million, or 13%, for the quarter ended July 31, 2022 compared to the corresponding period in fiscal 2021. This increase was primarily driven by price increases of 20% as well as a favorable product mix, partially offset by an 8% decrease in sales volumes.
Net sales for prepared avocado products decreased $1.8 million, or 9%, for the quarter ended July 31, 2022 compared to the corresponding period in fiscal 2021, primarily due to a decrease in the total volume of pounds sold.
Nine Months Ended July 31, 2022 vs. Nine Months Ended July 31, 2021
Net sales for the Prepared products business increased by approximately $22.1 million, or 6%, for the nine months ended July 31, 2022 compared to the corresponding period in fiscal 2021. This increase in Prepared product sales during the nine months ended July 31, 2022 was primarily related to increased sales prices of fresh-cut fruit & vegetables and prepared foods products. Partially offsetting these increases was a decrease in sales of prepared avocado products due to overall lower sales volume.
Net sales for fresh-cut fruit & vegetables and prepared foods products for the nine months ended July 31, 2022 compared to the corresponding period in fiscal 2021 increased $24.3 million, or 8%. This increase primarily reflects price increases of 14% as well as a favorable product mix, partially offset by a 5% decrease in sales volumes.
Net sales for prepared avocado products for the nine months ended July 31, 2022 compared to the corresponding period in fiscal 2021 decreased $1.4 million, or 3%, primarily due to a decrease in the total volume sold.
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Gross Profit
The following table summarizes our gross profit and gross profit percentages by business segment for the three and nine months ended July 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | |
| | Three months ended July 31, | | Nine months ended July 31, | | | ||||||||||||
| | 2022 | | Change | | 2021 | | 2022 | | Change | | 2021 | | | ||||
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Gross profit (loss): |
| |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
Grown | | $ | 11,771 | | (4) | % | $ | 12,202 | | $ | 41,594 | | 3 | % | $ | 40,355 | | |
Prepared | |
| 6,743 | | 256 | % |
| (4,335) | |
| 11,890 | | 50 | % |
| 7,951 | | |
Total gross profit | | $ | 18,514 | | 135 | % | $ | 7,867 | | $ | 53,484 | | 11 | % | $ | 48,306 | | |
| | | | | | | | | | | | | | | | | | |
Gross profit (loss) percentages: | | | | | | | | | | | | | | | | | | |
Grown | |
| 5.7 | % | | |
| 7.6 | % |
| 7.2 | % | | |
| 9.2 | % | |
Prepared | |
| 5.0 | % | | |
| (3.5) | % |
| 3.2 | % | | |
| 2.3 | % | |
Consolidated | |
| 5.4 | % | | |
| 2.8 | % |
| 5.6 | % | | |
| 6.2 | % | |
Summary
Our cost of goods sold consists predominantly of ingredient costs (fruit, vegetables and other food products), packing materials, freight and handling, labor and overhead (including depreciation) associated with packing, distributing and/or preparing food products, and other direct expenses pertaining to products sold.
Gross profit increased by approximately $10.6 million, or 135%, for the third quarter of fiscal 2022 compared to the corresponding period in fiscal 2021. The increase was primarily attributable to gross profit increases in the Prepared segment. Gross profit increased by approximately $5.2 million, or 11%, for the nine months ended July 31, 2022 compared to the corresponding period in fiscal 2021. The increase reflects gross profit increases across both the Prepared and Grown segments.
Grown products
The decrease in our Grown products gross profit for the quarter ended July 31, 2022 was the result of decreased gross profit for tomatoes, papayas and negative currency impact. Overall gross profit increased for avocados, along with an increase in gross profit per carton, while the overall gross profit percentage decreased. For the third quarter of fiscal 2022, the gross profit percentage for avocados was 5.9% compared to 7.5% for the third quarter of 2021. The decrease in gross profit percentage was largely a formulaic result as the dramatic increase in sales prices for avocados was proportionately greater than the increase in gross profit per case.
Gross profit for the quarter was also affected by the weakening of the U.S. dollar in relation to the Mexican peso during the quarter, resulting in a $0.4 million net loss related the remeasurement of peso-dominated net assets at our Mexican subsidiaries. This is in comparison to a remeasurement gain of $0.5 million for the same period last year.
The increase in our Grown products gross profit for the nine months ended July 31, 2022 was the result of increased gross profit for avocados, including an increase on gross profit per carton. Overall gross profit increased for avocados, while the overall gross profit percentage decreased. For the nine months ended July 31, 2022 the gross profit percentage for avocados was 7.2% compared to 9.2% for the nine months ended July 31,2021. The decrease in gross profit percentage was largely a formulaic result as the dramatic increase in sales prices for avocados was proportionately greater than the increase in gross profit per case.
Gross profit for the nine months ended July 31, 2022 was also affected by the weakening of the U.S. dollar in relation to the Mexican peso, resulting in a $1.3 million net loss related to the remeasurement of peso-dominated net assets at our Mexican subsidiaries. This is in comparison to a remeasurement gain of $1.1 million for the same period last year.
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Note that any additional significant fluctuations in the exchange rate between the U.S. dollar and the Mexican peso may have a material impact on future gross profits for our Grown products segment.
Prepared products
The increase in our Prepared products gross profit for the three and nine months ended July 31, 2022 was the result of increased gross profit for fresh-cut fruit & vegetables and prepared foods, partially offset by decreases in gross profit from prepared avocado products.
Fresh-cut fruit & vegetables and prepared foods products gross profit percentages for the three and nine months ended July 31, 2022 were 7.7% and 3.4%, compared to losses of 5.4% and 1.1% for the same prior year periods. The increases in gross profit for the three and nine months ended July 31, 2022 were mainly due to increased sales prices and a reduction in distribution expenses, an increase in product yield and labor productivity, and a reduction in costs related to the consolidation of operations in our Green Cove Springs, Florida facility into our Georgia facility.
Prepared avocado products gross loss percentage for the three months ended July 31, 2022 was 11.5%, compared to a gross profit of 6% for the prior year period. Prepared avocado products gross profit percentage for the nine months ended July 31, 2022 was 3.3% compared to a gross profit of 20.0% for the prior year period. The decreases in Prepared avocado products gross profit were due primarily to higher raw product fruit costs associated with the same shortage of supply that drove our whole avocado prices to historically high levels and increased manufacturing costs. Any significant fluctuation in the cost of fruit used in the production process or the exchange rate between the U.S. dollar and the Mexican peso may have a material impact on future gross profit for our Prepared segment.
Management has considered the impact of current operating results as well as expected future results and has concluded that there were no impairment indicators regarding intangible assets carried on the balance sheet as of July 31, 2022. This is consistent with the Company’s previous assessments which reflected a significant cushion between the Company’s fair value determinations and the recorded carrying values of the respective intangible assets. Management will continue to evaluate the impact of operating results on these considerations in future quarters.
Selling, General and Administrative
| | | | | | | | | | | | | | | | | |
| Three months ended July 31, | | Nine months ended July 31, | | | ||||||||||||
| 2022 | | Change | | 2021 | | 2022 | | Change | | 2021 | | | ||||
| (Dollars in thousands) | (Dollars in thousands) | | ||||||||||||||
Selling, general and administrative | $ | 16,713 |
| 35 | % | $ | 12,387 |
| $ | 48,566 |
| 20 | % | $ | 40,374 |
| |
Percentage of net sales |
| 4.9 | % | | |
| 4.3 | % |
| 5.1 | % | | |
| 5.2 | % | |
Selling, general and administrative expenses of $16.7 million for the three months ended July 31, 2022 include costs of marketing and advertising, sales expenses (including broker commissions) and other general and administrative costs. Selling, general and administrative expenses increased by $4.3 million, or 35%, for the three months ended July 31, 2022 compared to the prior year period. This increase was primarily due to an increase in consulting services and recruiting fees related to restructuring efforts ($1.3 million), an increase due to certain costs ($1.7 million) being recategorized as cost of goods sold in the prior year, an increase in bonus accruals related to our new bonus plan ($0.8 million), an increase in salaries and benefits ($0.3 million) and an increase in stock-based compensation ($0.2 million).
Selling, general and administrative expenses of $48.6 million for the nine months ended July 31, 2022 include costs of marketing and advertising, sales expenses (including broker commissions) and other general and administrative costs. Selling, general and administrative expenses increased by $8.2 million, or 20%, for the nine months ended July 31, 2022 compared to the prior year period. This increase was primarily due to an increase in consulting services related to restructuring efforts ($2.8 million), an increase in management restructuring costs that include recruiting fees and severance ($1.8 million), and an increase in salaries primarily related to the investment in key personnel to advance Project Uno ($1.3 million).
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Loss from unconsolidated entities
| | | | | | | | | | | | | | | | | | |
| | Three months ended July 31, | | Nine months ended July 31, |
| | ||||||||||||
| | 2022 | | Change | | 2021 | | 2022 | | Change | | 2021 |
| | ||||
| | (Dollars in thousands) | | (Dollars in thousands) |
| | ||||||||||||
Loss from unconsolidated entities |
| $ | (269) |
| (43) | % | $ | (469) |
| $ | (812) |
| (54) | % | $ | (1,755) | | |
Losses from unconsolidated entities includes our participation in earnings or losses from our investments in Don Memo. For the three months ended July 31, 2022 and 2021 we realized losses from Agricola Don Memo totaling $0.3 million and $0.5 million. For the nine months ended July 31, 2022 and 2021 we realized losses from Agricola Don Memo totaling less than $0.8 million and $1.8 million.
Income Taxes Benefit (Provision)
| | | | | | | | | | | | | | | | | | |
| | Three months ended July 31, | | Nine months ended July 31, | | | ||||||||||||
| | 2022 | | Change | | 2021 | | 2022 | | Change | | 2021 | | | ||||
| | | | | | | | | | | | | | | | | | |
Income tax benefit (provision) |
| $ | (984) |
| (92) | % | $ | (12,358) |
| $ | 363 |
| (102) |
| $ | (17,073) |
| |
Effective tax rate | |
| 42.8 | % | | |
| (2,218.7) | % |
| 10.4 | % | | |
| 93.9 | % | |
Our tax provision is determined using an estimated annual effective tax rate and is adjusted for discrete taxable events that may occur during the quarter. In the third quarter of fiscal 2022, we incurred return to provision discrete taxable items in the amount of $1.4 million. These discrete items were primarily related to rate differentials related to our carryback losses from prior years and the lack of deductibility of certain Mexican tax expenses.
Liquidity and Capital Resources
Cash provided by operating activities was $42.2 million for the nine months ended July 31, 2022, compared to cash provided by operating activities of $12.4 million for the corresponding period in fiscal 2021. Cash provided by operating activities for the nine months ended July 31, 2022 reflect primarily our net loss of $3.1 million, plus add-backs for non-cash activities (depreciation and amortization, stock-based compensation expense, provision for losses on accounts receivable, losses from unconsolidated entities, net gains or losses on Limoneira shares, loss on disposal of property, plant and equipment, impairment related to closure of Prepared’s Florida facility and gain on the sale of the Temecula packinghouse) of $21.4 million and net cash generating improvements in the components of our working capital of approximately $23.9 million.
Increases in operating cash flows caused by working capital changes include an increase in payable to growers of $12.7 million, a net increase in accounts payable, accrued expenses and other liabilities of $11.4 million, a decrease in inventory of $4.6 million, a decrease in income taxes receivable of $3.0 million, and a decrease in accounts receivable of $0.4 million, partially offset by an increase in advances to suppliers of $4.9 million and an increase in other assets of $3.2 million
The increase in payable to growers is mostly due to increased cost per unit, resulting from supply constraints for California and Mexican avocados in the month of July 2022 compared to October 2021. The increase in accounts payable, accrued expenses and other liabilities is primarily related to an increase in payables related to an increase in the price of California and Mexican avocados. The decrease in our inventory as of July 31, 2022, when compared to October 31, 2021, is primarily due to lower inventory of Mexican Avocados. The decrease in income taxes receivable is due to the receipt of an income tax refund in the first quarter of fiscal 2022. The decrease in our accounts receivable, despite an increase in sales, as of July 31, 2022, when compared to October 31, 2021, is primarily due an improvement in collections of accounts receivable in fiscal 2022. The increase in advances to suppliers is mainly due to advances to our tomato growers in the first three months of fiscal 2022.
Cash used in investing activities was $7.7 million for the nine months ended July 31, 2022, which related to purchases of property, plant, and equipment.
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Cash used in financing activities was $33.9 million for the nine months ended July 31, 2022, which related principally to the payment of a $20.3 million dividend, net payments on our credit facilities totaling $12.1 million, payments on long-term obligations of $1.4 million, and the $0.1 million of payments on the minimum net holding of taxes on the net settlement of shares.
Our principal sources of liquidity are our existing cash reserves, cash generated from operations and amounts available for borrowing under our existing credit facilities. Restricted cash, cash and cash equivalents as of July 31, 2022 and October 31, 2021 totaled $3.5 million and $2.9 million. Our working capital at July 31, 2022 was $29.5 million, compared to $38.0 million at October 31, 2021.
We believe that cash flows from operations, the available Credit Facility, and other sources will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements for at least the next twelve months. We will continue to pursue grower recruitment opportunities and expand relationships with retail and/or foodservice customers to fuel growth in each of our business segments. We have a revolving credit facility with Bank of America as administrative agent and Farm Credit West as joint lead arranger. Under the terms of this agreement, we may draw on funds for both working capital and long-term productive asset purchases. Total credit available under this agreement, subject to borrowing base calculations, is $80 million, and it expires in January 2026. For our Credit Facility the weighted-average interest rate was 5.1% and 2.2% at July 31, 2022 and October 31, 2021. Under the Credit Facility we had $25.6 million and $37.7 million outstanding as July 31, 2022 and October 31, 2021.
On December 1, 2021, we entered into the Fourth and Fifth Amendments to the Credit Agreement with Bank of America, N.A., as administrative agent (“Bank of America”), and Farm Credit West, PCA (together with Bank of America, the “Lenders”), relating to our Credit Agreement dated as of June 14, 2016, The Fourth and Fifth Amendments, among other terms, included Calavo de Mexico (CDM) as a guarantor, increased the interested rate by 0.5%, and amended the financial covenant requirements as follows:
| ● | The Fixed Charge Coverage Ratio (FCCR) covenant was waived for the quarters ended October 31, 2021, January 31, 2022 and April 30, 2022. The covenant was resumed for the quarter ended July 31, 2022. |
| ● | The quarterly FCCR covenant was replaced by a cumulative monthly minimum Consolidated EBITDA covenant, with the first measurement occurring as of January 31, 2022 for the three months then ended, and continuing monthly thereafter through June 2022. |
| ● | Consolidated financial statements must be submitted monthly for the month and year-to-date period, beginning with the financial statements for the month of November 2021 and continuing through June 2022. |
The Company also pledged the 1,677,299 shares it holds of Limoneira stock as collateral (which was in addition to the general business assets of the Company that already secure the credit facility).
The above terms and conditions will remain in effect until such time as the Company has certified compliance with a 1.15 to 1.0 minimum FCCR for two consecutive fiscal quarters.
As of January 31, 2022, the Company was not in compliance with the cumulative monthly minimum Consolidated EBITDA covenant, and the Consolidated Leverage Ratio (CLR) covenant. In March 2022, the Company and the Lenders have entered into the Sixth Amendment, Limited Waiver, and Limited Consent to Credit Agreement (the “Sixth Amendment”). The Sixth Amendment, among other terms, waived the non-compliance of the financial covenants as of January 31, 2022 and amended the financial covenant requirements as follows:
| ● | The cumulative monthly minimum Consolidated EBITDA testing has been waived and the CLR covenant testing is waived through July 31, 2022. |
| ● | Minimum Consolidated EBITDA of $3 million, $3 million and $5 million for the months of February, March and April 2022, respectively, will be required. |
| ● | Monthly cumulative FCCR of 1.20 starting with the quarter ended April 30, 2022, converting to trailing 12 months calculation starting as of October 31, 2022 and quarterly thereafter. For April through September 2022, dividends paid in December 2021 are included on a pro-rata basis. |
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The interest rate of the facility increased to BSBY plus 3.0% until the first business day of the month after we certify that no default or event of default exists for the period ended July 31, 2022, at which point the interest rate will range between BSBY plus 1.25 – 1.75% based on our CLR. The total facility reduced from $100 million to $80 million and will be limited to a borrowing base consisting of the sum of eligible accounts receivable (80%), eligible US inventory (50%), and Limoneira shares (60%), less grower payables.
As of July 31, 2022, we were in compliance with the financial covenants as in effect on that date, and we expect to remain in compliance through September 2023. As of July 31, 2022, approximately $16.8 million was available for borrowing based on our borrowing base calculation discussed above.
Contractual Commitments
There have been no other material changes to our contractual commitments from those previously disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, 2021. For a summary of the contractual commitments at October 31, 2021, see Part II, Item 7, in our 2021 Annual Report on Form 10-K.
Impact of Recently Issued Accounting Pronouncements
See Note 1 to the consolidated condensed financial statements included in this Quarterly Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts receivable, payable to growers, accounts payable, current and long-term borrowings pursuant to our Credit Facility, and long-term, fixed-rate obligations. All of our financial instruments are entered into during the normal course of operations and have not been acquired for trading purposes. The table below summarizes interest rate sensitive financial instruments and presents principal cash flows in U.S. dollars, which is our reporting currency, and weighted-average interest rates by expected maturity dates, as of July 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | |
(All amounts in thousands) | | Expected maturity date July 31, | | ||||||||||||||||||||||
|
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Thereafter |
| Total |
| Fair Value | | ||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted cash, cash and cash equivalents (1) | | $ | 3,466 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,466 | | $ | 3,466 | |
Accounts receivable (1) | |
| 78,490 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 78,490 | |
| 78,490 | |
Advances to suppliers (1) | |
| 12,698 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 12,698 | |
| 12,698 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | |
Payable to growers (1) | | $ | 35,748 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 35,748 | | $ | 35,748 | |
Accounts payable (1) | |
| 11,551 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 11,551 | |
| 11,551 | |
Borrowings pursuant to credit facilities (1) | |
| — | |
| — | |
| — | |
| 25,600 | |
| — | |
| — | |
| 25,600 | |
| 25,600 | |
| (1) | We believe the carrying amounts of cash and cash equivalents, accounts receivable, advances to suppliers, payable to growers, and accounts payable approximate their fair value due to the short maturity of these financial instruments and the carrying amount of borrowings pursuant to credit facilities approximates fair market value due to the variable rate of interest. |
We were not a party to any derivative instruments during the fiscal year. It is currently our intent not to use derivative instruments for speculative or trading purposes. Additionally, we do not use any hedging or forward contracts to offset market volatility.
Our Mexican-based operations transact a significant portion of business in Mexican pesos. Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy domestic cash needs. We do not currently use derivative instruments to hedge fluctuations in the Mexican peso to U.S. dollar exchange rates. Management does, however, evaluate this opportunity from time to time. Total foreign currency remeasurement losses for the three months ended
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July 31, 2022 and 2021, net of gains, was $0.4 million. Total foreign currency remeasurement gains for the three months ended July 31, 2022 and 2021, net of losses, was $0.4 million. Total foreign currency remeasurement losses for the nine months ended July 31, 2022, net of gains, was $1.3 million. Total foreign currency remeasurement gains for the nine months ended July 31, 2021, net of losses, was $1.2 million.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective.
Except as set forth below, there were no changes in the Company’s internal control over financial reporting during the quarter ended July 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. During the third quarter of fiscal 2022, we had changes in our management structure, including the placement of our new Chief Financial Officer. These changes resulted in changes in our internal control over financial reporting as responsibilities were shifted to other personnel. Taking into account these changes, as noted above, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in litigation arising in the ordinary course of our business. We have provided information about certain legal proceedings in which we are involved in Note 7 to the consolidated condensed financial statements included in this Quarterly Report for further information.
ITEM 1A. RISK FACTORS
For a discussion of our risk factors, see Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, 2021. Except as set forth below, there have been no material changes from the risk factors set forth in such Annual Report on Form 10-K. However, the risks and uncertainties that we face are not limited to those set forth in the 2021 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock.
ITEM 5. OTHER INFORMATION
We have determined that, due to an administrative error, the version of our Amended and Restated Bylaws, effective as of September 25, 2014, included as an exhibit to our Current Report on Form 8-K filed with the SEC on September 30, 2014 (the “2014 Item 5.03 8-K”) and incorporated by reference into subsequent SEC filings including our Form 10-K for the year ended October 31, 2021, erroneously included certain language that did not reflect our bylaws as they were in fact amended on that date. Disclosures provided in the 2014 Item 5.03 8-K concerning the amendment to the bylaws made at that time and in our other subsequent filings with the SEC regarding our bylaws accurately reflected the terms of our bylaws. The correct version of our Amended and Restated Bylaws effective as of September 25, 2014 is included as Exhibit 3.1 to this Quarterly Report on Form 10-Q.
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ITEM 6. EXHIBITS
| | |
| 3.1 | Amended and Restated Bylaws, effective as of September 25, 2014 * |
| | |
| 10.1 | |
| 10.2 | |
| | |
| 10.3 | |
| | |
| 31.1 | |
| | |
| 31.2 | |
| | |
| 32.1 | |
| | |
| 101 | The following financial information from the Quarterly Report on Form 10-Q of Calavo Growers, Inc. for the quarter ended July 31, 2022, formatted in Inline XBRL (Extensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of July 31, 2022 and October 31, 2021; (2) Consolidated Condensed Statements of Operations for the three and nine months ended July 31, 2022 and 2021; (3) Consolidated Condensed Statements of Cash Flows for the nine months ended July 31, 2022 and 2021; (4) Consolidated Statements of Shareholders’ Equity for the three and nine months ended July 31, 2022 and 2021; and (5) Notes to Consolidated Condensed Financial Statements. |
| | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL). |
| (1) | Previously filed on June 2, 2022 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. |
| (2) | Previously filed on June 10, 2022 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| (3) | Previously filed on June 22, 2022 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
* | Filed with this Form 10-Q. |
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SIGNATURES
Pursuant to the requirements 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.
| Calavo Growers, Inc. | |
| (Registrant) | |
| | |
| | |
Date: September 1, 2022 | | |
| By | /s/ Brian Kocher |
| | |
| | President and Chief Executive Officer (Principal Executive Officer) |
| | |
| | |
| | |
Date: September 1, 2022 | | |
| By | /s/ Shawn Munsell |
| | |
| | Chief Financial Officer (Principal Financial Officer) |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
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| 12/13/22 | ||||
| 10/31/22 | ||||
| Filed on: | 9/1/22 | 8-K | ||
| 8/31/22 | ||||
| 8/16/22 | 3, 4 | |||
| 8/8/22 | 8-K | |||
| 8/2/22 | ||||
| For Period end: | 7/31/22 | |||
| 7/7/22 | ||||
| 6/22/22 | 8-K | |||
| 6/16/22 | ||||
| 6/10/22 | 8-K | |||
| 6/2/22 | 10-Q, 8-K | |||
| 5/9/22 | ||||
| 4/30/22 | 10-Q | |||
| 4/29/22 | 8-K | |||
| 4/27/22 | 8-K, DEF 14A | |||
| 4/13/22 | 3, 8-K | |||
| 4/1/22 | 4 | |||
| 3/10/22 | ||||
| 3/4/22 | ||||
| 2/25/22 | ||||
| 2/4/22 | ||||
| 2/1/22 | 3, 4, 8-K | |||
| 1/31/22 | 10-Q | |||
| 1/21/22 | ||||
| 1/20/22 | 4 | |||
| 1/3/22 | 4, 8-K | |||
| 12/13/21 | 4 | |||
| 12/3/21 | 3, 4 | |||
| 12/1/21 | 3, 4, 8-K | |||
| 11/15/21 | ||||
| 11/12/21 | ||||
| 10/31/21 | 10-K | |||
| 10/18/21 | 8-K | |||
| 9/22/21 | ||||
| 8/27/21 | ||||
| 8/20/21 | ||||
| 8/18/21 | ||||
| 7/31/21 | 10-Q | |||
| 6/25/21 | ||||
| 6/16/21 | 8-K | |||
| 4/30/21 | 10-Q | |||
| 4/21/21 | 8-K, DEF 14A | |||
| 3/12/21 | ||||
| 1/31/21 | 10-Q | |||
| 10/31/20 | 10-K | |||
| 6/14/16 | 8-K | |||
| 9/30/14 | 8-K | |||
| 9/25/14 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 6/22/22 Calavo Growers Inc. 8-K:5,7,8,9 6/20/22 12:301K Toppan Merrill Bridge/FA 6/10/22 Calavo Growers Inc. 8-K:5,7,9 6/09/22 12:293K Toppan Merrill Bridge/FA 6/02/22 Calavo Growers Inc. 10-Q 4/30/22 62:8.2M Toppan Merrill Bridge/FA |