UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | ||
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 31, 2010
OR
| ¨ | ||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-33385
CALAVO GROWERS, INC.
(Exact name of registrant as specified in its charter)
| California | 33-0945304 | ||
(State of incorporation) | (I.R.S. Employer Identification No.) | ||
| 1141-A Cummings Road, Santa Paula, CA | 93060 | ||
| (Address of principal executive offices) | (Zip code) | ||
Registrant’s telephone number, including area code: (805) 525-1245
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | ||
Name Of Each Exchange | ||
| On Which Registered | ||
| Common Stock, $0.001 Par Value per Share | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso¨ Noþx
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso¨ Noþx
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. Yesþx Noo¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesox Noo¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | |||||||
| Non-accelerated filer | ||||||||
| ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||||
Indicate by check mark if whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Noþx
Based on the closing price as reported on the Nasdaq Global Select Market, the aggregate market value of the Registrant’s Common Stock held by non-affiliates on April 30, 20102011 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $207.0$262.9 million. Shares of Common Stock held by each executive officer and director and by each shareholder affiliated with a director or an executive officer have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s Common Stock as of November 30, 20102011 was 14,711,833.
Documents Incorporated by Reference
Portions of the Registrant’s Proxy Statement for the 20112012 Annual Meeting of Shareholders, which we intend to hold on April 27, 201125, 2012 are incorporated by reference into Part III of this Form 10-K. The definitive Proxy Statement will be filed within 120 days after October 31, 2010.
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements relating to futurethat involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo Growers, Inc. (including certain projectionsInc and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. Forward-looking statements frequently are identifiable by the use of words such as “believe,” “anticipate,” “expect,” “intend,” “will,” and other similar expressions. Our actual resultsits consolidated subsidiaries (CG) may differ materially from those projected as a resultexpressed or implied by such forward-looking statements and assumptions. All statements, other than statements of certain risks and uncertainties. These risks and uncertainties include,historical fact, are statements that could be deemed forward-looking statements, including, but are not limited to: increased competition, general economicto, any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flows, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and business conditions, energy costsobjectives of management for future operations, including execution of restructuring and availability, conducting substantial amountsintegration plans; any statements regarding current or future macroeconomic trends or events and the impact of business internationally, pricingthose trends and events on CG and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic trends and events; the competitive pressures on agriculturalfaced by CG’s businesses; the development and transition of new products adverse weather and growing conditions confronting avocado growers, new governmental regulations, as well asservices (and the enhancement of existing products and services) to meet customer needs; integration and other risks associated with business combinations; the hiring and uncertainties,retention of key employees; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including, those set forthbut not limited to, the items discussed in “Risk Factors” in Item 1A. Risk Factors1A of this report, and elsewhere in this Annual Report on Form 10-K and those detailedthat are otherwise described or updated from time to time in our other filings with theCG’s Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and we undertakeCommission reports. CG assumes no obligation and does not intend to update or revise thethese forward-looking statements, whether as a result of new information, future events or otherwise.
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Item 1. Business
General development of the business
Calavo Growers, Inc. (Calavo, the Company, we, us or our) procures, is a global leader in the avocado industry and markets avocados and other perishable commodities and prepares and distributes processed avocado products.an expanding provider of value-added fresh food. Our expertise in marketing and distributing avocados, processedprepared avocados, and other perishable foods allows us to deliver a wide array of fresh and processedprepared food products to food distributors, produce wholesalers, supermarkets, convenience stores, and restaurants on a worldwide basis. We procure avocados principally from California, Mexico, and Chile. Through our various operating facilities, in Arizona, California, Hawaii, New Jersey, Texas, and Mexico, we sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas for distributionpapayas. Additionally, we also produce salsa and prepare ready-to-eat produce and deli products. We distribute our products both domestically and internationally. We also have an operating facility in Minnesota that produces salsa. Weinternationally and report our operations in two different business segments: (1) Fresh products and (2) CalavoFoods.Calavo Foods. See Note 11 in our consolidated financial statements for further information about our business segments. Our principal executive offices are located at 1141-A Cummings Road, Santa Paula, California 93060; telephone (805) 525-1245.
On October 9, 2001, we completed a series of transactions whereby common and preferred shareholders of Calavo Growers of California (the Cooperative), an agricultural marketing cooperative association, exchanged all of their outstanding shares for shares of our common stock. Concurrent with this transaction, the Cooperative was merged into us with Calavo Growers, Inc. (Calavo) emerging as the surviving entity. These transactions had the effect of converting the legal structure of the business from a non-profit cooperative to a for-profit corporation.
In June 2011, Calavo, CG Mergersub LLC (Newco), Renaissance Food Group, LLC (RFG) and Liberty Fresh Foods, LLC, Kenneth Catchot, Cut Fruit, LLC, James Catchot, James Gibson, Jose O. Castillo, Donald L. Johnson and RFG Nominee Trust (collectively, the Sellers) entered into an Agreement and Plan of Merger dated May 25, 2011 (the Acquisition Agreement), which sets forth the terms and conditions pursuant to which Calavo would acquire a 100 percent ownership interest in RFG. Pursuant to the Acquisition Agreement, Newco, a newly formed Delaware limited liability company and wholly-owned subsidiary of Calavo, merged with and into RFG, with RFG as the surviving entity. RFG is a fresh-food company that produces, markets, and distributes nationally a portfolio of healthy, high quality products for consumers via the retail and foodservice channels. See Note 17 in our consolidated financial statements for further information.
In February 2010, Calavo, Calavo Salsa Lisa, LLC (CSL), Lisa’s Salsa Company (LSC) and Elizabeth Nicholson and Eric Nicholson, entered into an Asset Purchase and Contribution Agreement, dated February 8, 2010 (the Acquisition Agreement), which sets forth the terms and conditions pursuant to which Calavo acquired a 65 percent ownership interest in newly created CSL which acquired substantially all of the assets of LSC. Elizabeth Nicholson and Eric Nicholson, through LSC, hold the remaining 35 percent ownership of CSL. LSC is a regional producer in the upper Midwest of Salsa Lisa refrigerated salsas. We believe that this line of salsas will further diversify our product offerings and will be a natural complement to our ultra-high-pressure guacamole, as well as our Calavo tortilla chips.
In June 2009, we (through a wholly owned subsidiary: Calavo Inversiones (Chile) Limitada) entered into a joint venture agreement with Exportadora M5, S.A. (M5) for the purpose of selling and distributing Chilean sourced avocados, as well as other perishable commodities. Such joint venture operates under the name of Calavo de Chile and commenced operations in July 2009. M5 and Calavo each have an equal one-half ownership interest in Calavo de Chile, but M5 has overall management responsibility for the operations of Calavo De Chile.
In June 2007, we entered into a distribution agreement with Agricola Belher (Belher) of Mexico, a well-established quality producer of fresh vegetables, primarily tomatoes, for export to the U.S. market. Pursuant to such distribution agreement, Belher agreed, at their sole cost and expense, to harvest, pack, export, ship, and deliver tomatoes exclusively to our company, primarily our Arizona facility. In exchange, we agreed to sell and distribute such tomatoes, make advances to Belher for operating purposes, provide additional advances as shipments are made during the season (subject to limitations, as defined), and return the proceeds from such tomato sales to Belher, net of our commission and aforementioned advances. The agreement also allows for us to advance additional amounts to Belher at our sole discretion. In June 2011, we entered into an addendum that extended the distribution agreement with Belher. This agreement expires in July 2019.
We also entered into an infrastructure agreement in June 2007 with Belher, which was extended through the addendum in June 2011, in order to significantly increase production yields and fruit quality. Pursuant to this agreement, we made advances to be used solely for the acquisition, construction, and installation of improvements to and on certain land owned/controlled by Belher, as well as packing line equipment. Advances incur interest at 4.7% and 6.5% at October 31, 2011 and 2010. We have advanced a total of $4.2 million and $2.4 million as of October 31, 2011 and 2010 ($0.8 million and $1.2 million included in prepaid expenses and other
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current assets and $3.4 million and $1.2 million included in other long-term assets). Belher is to annually repay these advances in no less than 20% increments through July 2016. Interest is to be paid monthly or annually, as defined. Belher may prepay, without penalty, all or any portion of the advances at any time. In order to secure their obligations pursuant to both agreements discussed above, Belher granted us a first-priority security interest in certain assets, including cash, inventory and fixed assets, as defined.
In August 2006, we entered into a joint venture agreement with San Rafael Distributing (SRD) for the purpose of the marketing, sale and distribution of fresh produce from the existing location of SRD at the Los Angeles Wholesale Produce Market (Terminal Market), located in Los Angeles, California. Such joint venture operates under the name of Maui Fresh International, LLC (Maui Fresh) and commenced operations in August 2006. SRD and Calavo each have an equal one-half ownership interest in Maui Fresh, but SRD has overall management responsibility for the operations of Maui Fresh at the Terminal Market.
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We maintain an Internet website at http://www.calavo.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and other information related to us, are available, free of charge, on our website as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the Securities and Exchange Commission. Our Internet website and the information contained therein, or connected thereto, is not and is not intended to be incorporated into this Annual Report on Form 10-K.
Fresh products
Calavo was founded in 1924 to market California avocados. In California, the growing area stretches from San Diego County to Monterey County, with the majority of the growing areas located approximately 100 miles north and south of Los Angeles County. The storage life of fresh avocados is limited. It generally ranges from one to four weeks, depending upon the maturity of the fruit, the growing methods used, and the handling conditions in the distribution chain.
We sell avocados to a diverse group of supermarket chains, wholesalers, food service and other distributors, under the Calavo family of brand labels, as well as private labels. From time to time, some of our larger customers seek short-term sales contracts that formalize their pricing and volume requirements. Generally, these contracts contain provisions that establish a price floor and/or ceiling during the contract duration. In our judgment, the shift by our customers to drafting sales contracts benefits large handlers like us, which have the ability to fulfill the terms of these contracts. During fiscal year 2011, our 5 and 25 largest fresh customers represented approximately 22% and 44% of our total consolidated revenues. During fiscal year 2010, our 5 and 25 largest fresh customers represented approximately 24% and 48% of our total consolidated revenues. During fiscal year 2009,2011 none of our 5 and 25 largest fresh customers represented approximately 20% and 46%more than 10% of our total consolidated revenues. During fiscal year 2010, one fresh customer represented approximately 11% of our total consolidated revenues. During fiscal yearsyear 2009 and 2008 none of our fresh customers represented more than 10% of total consolidated revenues.
The Hass variety is the predominant avocado variety marketed on a worldwide basis. Generally, California grown Hass avocados are available year-round, with peak production periods occurring between January through October. Other varieties have a more limited picking season and generally command a lower price. Approximately 1,9501,900 California growers deliver avocados to us, generally pursuant to a standard marketing agreement. Over the past several years, our share of the California avocado crop has remained strong, with approximately 30%28% of the 20102011 shipped California avocado crop handled by us, based on data published by the California Avocado Commission. We attribute our solid foothold in the California industry principally to the competitiveness of the per pound returns we pay and the communication and service we maintain with our growers.
California avocados delivered to our packinghouses are graded, sized, packed, cooled and, frequently, ripened for delivery to customers. Our ability to estimate the size, as well as the timing of the delivery of the annual avocado crop, has a substantial impact on both our costs and the sales price we receive for the fruit. To that end, our field personnel maintain direct contact with growers and farm managers and coordinate harvest plans. The feedback from our field-managers is used by our sales department to prepare sales plans used by our direct sales force.
A significant portion of our California avocado handling costs is fixed. As a result, significant fluctuations in the volume of avocados delivered have a considerable impact on the per pound packing costs of avocados we handle. Generally, larger crops will result in a lower per pound handling cost. We believe that our cost structure is geared to optimally handle larger avocado crops. Our strategy calls for continued efforts in aggressively recruiting new growers, retaining existing growers, and procuring a larger percentage of the California avocado crop.
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California avocados delivered to us are grouped as a homogenous pool on a weekly basis based on the variety, size, and grade. The proceeds we receive from the sale of each separate avocado pool, net of a packing and marketing fee to cover our costs and a profit, are paid back to the growers once each month. The packing and marketing fee we withhold is determined by our Chief
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The California avocado market is highly competitive with 9 major avocado handlers. A marketing order enacted by the state legislature is in effect for California grown avocados and provides the financial resource to fund generic advertising and promotional programs. Avocados handled by us are identifiable through packaging and the Calavo brand name sticker.
We also import avocados from Mexico, Chile, Peru, New Zealand and Peru.the Dominican Republic. Our strategy is to increase our market share of currently sourced avocados to all accepted marketplaces. We believe our diversified avocado sources provide a level of supply stability that may, over time, help solidify the demand for avocados among consumers in all the markets we distribute to.
We typically purchase Mexican avocados from growers and packers located in Mexico. The purchase price we pay for fruit acquired from Mexican growers is generally negotiated for substantially all the fruit in a particular grove. Once a purchase price is agreed to, the fruit is then harvested and delivered to our packinghouse located in Uruapan, Michoacán, Mexico. Once delivered, such fruit is weighed, graded, sized, packed, and cooled for shipment, primarily to the United States. Fruit purchased directly from Mexican packers however, is alreadyused as a supplemental source and is packed to our standards for shipment to either our customers or our operating facilities. This fruit is packed pursuant to our standards and is generally for additional, specific sizes we require. In either case, the purchase price of Mexican avocados is generally based our estimated selling prices of such fruit, less anticipated packing and/or selling costs and our desired margin. We believe these two sources allow us to maximize both the timely acquisition, as well as purchase price, of Mexican fruit.
Similar to California avocados, a significant portion of our handling costs for Mexican avocados are fixed. As a result, significant fluctuations in the volume of Mexican avocados delivered to our packinghouse can have a considerable impact on the per pound packing costs of avocados we handle. Generally, larger crops will result in a lower per pound handling cost. We believe that our cost structure for Mexican avocados is geared to optimally handle larger avocado crops.
We believe that our continued success in marketing Mexican avocados is largely dependent upon securing a reliable, high-quality supply of avocados at reasonable prices, and keeping the handling costs low as we ship the Mexican avocados to our packinghouses. We are subject to USDA and other regulatory inspections to ensure the safety and the quality of the fruit being delivered from Mexico. The Mexican avocado harvest, which is often considerably larger than the California avocado harvest, is both complimentary and competitive with the California market, as the Mexican harvest is near year round (most significant from September to June). As a result, it is common for Mexican growers to monitor the supply of avocados for export to the United States in order to obtain higher field prices. During 2010,2011, we packed and distributed approximately 21%23% of the avocados exported from Mexico into the United States and approximately 5% of the avocados exported from Mexico to countries other than the United States, based on our estimates.
We also handle avocados from Chile and Peru, most of which are on a consignment basis with the suppliers.our growers. Pursuant to our joint venture agreement with M5, Calavo de Chile is now the primary contact with our Chilean avocado sources. Our commission percentages often range frompercentage is approximately 8% to 10%. Additionally, from time to time, we may purchase Chilean sourced avocados. Pursuant to our consignment arrangements, we occasionally make advances to both Chilean and Peruvian growers. Historically, we made such advances related to both pre-harvest and post-harvest activities, but our focus during fiscal 20092010 and 20102011 was primarily related to post-harvest activities. Typically, we obtain collateral (i.e. fruit, fixed assets, etc.) that approximates the value at risk, prior to making such advances. Historical experience demonstrates that providing post-harvest advances results in our acquiring full market risk for the product, as it is possible (although unlikely) that our resalesale proceeds may be less than the amounts we paid to the grower. This is a result of the high level of volatility inherent in the avocado and perishable food markets, which are subject to significant pricing declines based on the availability of fruit in the market. In the event that we do make a pre-season advance, our ability to recover such pre-harvest advance would be largely dependent on the growers’ ability to deliver avocados to us, as well as the inherent risks of farming, such as weather and pests.
Sales of Chilean grown avocados have generally been significant during our 4th and 1st fiscal quarters. Additionally, with the Chilean harvesting season being complimentary to the California season (August through February), Chilean avocados are able to command competitive retail pricing in the market. During 2010,2011, we distributed approximately 5% of the total Chilean avocados imported into the United States, based on our estimates.
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We have developed a series of marketing and sales initiatives primarily aimed at our largest customers that are designed to differentiate our products and services from those offered by our competitors. Some of these key initiatives are as follows:
We continue to have success with our ProRipeVIP™ avocado ripening program. This proprietary program allows us to deliver avocados evenly ripened to our customers’ specifications. We have invested in the Aweta AFS (acoustic firmness sensor) technology and equipment. ProRipeVIP™ is the next generation of selling conditioned avocados that have firmness determined via soundwaves. This technology is fairly new to avocados. The most significant and compelling reason we invested in the Aweta systems is because the acoustic sensors measure firmness of the entire piece of fruit, as opposed to competitive mechanical tests that use pressure and calculated averages to measure firmness. We believe that ripened avocados help our customers address the consumers’ immediate needs and accelerate the sale of avocados through their stores. We currently have three Aweta systems in use in the United States, which, we believe, can effectively meet our customers’ demand for conditioned fruit.
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We have developed various display techniques and packages that appeal to consumers and, in particular, impulse buyers. Some of our techniques include the bagging of avocados and the strategic display of the bags within the produce section of retail stores. Our research has demonstrated that consumers generally purchase a larger quantity of avocados when presented in a bag as opposed to the conventional bulk displays. We also believe that the value proposition of avocados in a bag provides for a higher level of sales to grocery stores.
Calavo Foods
The CalavoFoodsCalavo Foods segment was originally conceived as a mechanism to stabilize the price of California avocados by reducing the volume of avocados available to the marketplace. In the 1960’s and early 1970’s, we pioneered the process of freezing avocado pulp and developed a wide variety of guacamole recipes to address the diverse tastes of consumers and buyers in both the retail and food service industries. One of the key benefits of frozen products is their long shelf-life. With the introduction of low cost processed products delivered from Mexican based processors, however, we realigned the segment’s strategy by shifting the fruit procurement and pulp processing functions to Mexico. In 1995, we invested in a processing plant in Mexicali, Mexico to derive the benefit of competitive avocado prices available in Mexico.
Through January 2003, the primary function of our Mexicali processed operation was to produce pulp for our Santa Paula plant. Our processing facility in Santa Paula, California would receive the pulp from Mexicali, add ingredients, and package the product in various containers. The product would then be frozen for storage with shipment to warehouses and, ultimately, to our customers. From January 2003 to August 2004, however, our Mexicali processed operations became primarily focused on our individually quick frozen (IQF) avocado half product line and one of our ultra high-pressure lines. Our IQF line provides food service and retail customers with peeled avocado halves that are ripe and suitable for immediate consumption. These halves were frozen, packaged and shipped out of Mexicali to warehouses located in the U.S., and, ultimately, to our customers.
In February 2003, our Board of Directors approved a plan whereby the operations of our CalavoFoodsCalavo Foods business would be relocated. The plan called for the closing of our Santa Paula, California and Mexicali, Baja California Norte (Mexicali) processing facilities and relocating these operations to a new facility in Uruapan, Michoacan, Mexico (Uruapan). This restructuring has provided for cost savings in the elimination of certain transportation costs, duplicative overhead structures, and savings in the overall cost of labor and services. The Uruapan facility commenced operations in February 2004 and the Santa Paula and Mexicali facilities ceased production in February 2003 and August 2004. Net sales of frozen products, typically sold to foodservices customers, represented approximately 54%51% and 53%54% of total CalavoFoodsCalavo Foods segment sales for the years ended October 31, 20102011 and 2009.
We utilize ultra high pressure machines which are designed to “cold pasteurize” our guacamole products. Using high pressure only, this procedure substantially destroys the cells of any bacteria that could lead to spoilage, food safety, or oxidation issues. Once the procedure is complete, our packaged guacamole is packagedcased and shipped to various retail and food service customers throughout the markets we service. In fiscal year 2010, we put a second 215L ultra high pressure machine into service. These machines, which are located in Uruapan, pressurize all guacamole product lines, within CalavoFoods, including all frozen products, which begun in fiscal 2010. We estimate
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We estimate that our operating capacity for all three ultra high pressure machines willto be 71% and we believe this reasonable given our current sales projections and expected growth. Net sales of our ultra high pressure (fresh) products, typically sold to retail customers, represented approximately 46%49% and 47%46% of total CalavoFoodsguacamole products within the Calavo Foods segment sales for the years ended October 31, 20102011 and 2009.
Sales in the U.S. and Canada are made principally through a commissioned nationwide broker network, which is supported by our regional sales managers. Our guacamole hummus is being sold on an exclusive basis through a leading national grocery chain under a one-year agreement. We believe that our marketing strength is distinguished by providing quality products, innovation, year-round product availability, strategically located warehouses, and market relationships. During fiscal year 2011, our 5 and 25 largest processed product customers represented approximately 9% and 17 % of our total consolidated revenues. During fiscal year 2010, our 5 and 25 largest processed product customers represented approximately 6% and 11% of our total consolidated revenues. During fiscal yearyears 2011, 2010 and 2009 our 5 and 25 largest processed product customers represented approximately 7% and 12% of our total consolidated revenues. During fiscal years 2010, 2009 and 2008 none of our processed product customers represented more than 10% of total consolidated revenues.
In February 2010, we entered into an Acquisition Agreement, which sets forth the terms and conditions pursuant to which we acquired a 65 percent ownership interest in newly created Calavo Salsa LisaCSL which acquired substantially all of the assets of LSC. Elizabeth Nicholson and Eric Nicholson, through LSC, hold the remaining 35 percent ownership of Calavo Salsa Lisa.CSL. LSC is a regional producer in the upper Midwest of Salsa Lisa refrigerated salsas. We believe that this new line of salsassalsa will further diversify our product offerings and will be a natural complement to our ultra-high-pressure guacamole, as well as our recently introduced Calavo tortilla chips.
In June 2011, Calavo, CG Mergersub LLC (Newco), Renaissance Food Group, LLC (RFG) and Liberty Fresh Foods, LLC, Kenneth Catchot, Cut Fruit, LLC, James Catchot, James Gibson, Jose O. Castillo, Donald L. Johnson and RFG Nominee Trust (collectively, the Sellers) entered into an Agreement and Plan of Merger dated May 25, 2011 (the Acquisition Agreement), which sets forth the terms and conditions pursuant to which Calavo would acquire a 100 percent ownership interest in RFG. Pursuant to the Acquisition Agreement, Newco, a newly formed Delaware limited liability company and wholly-owned subsidiary of Calavo, merged with and into RFG, with RFG as the surviving entity. RFG is a fresh-food company that produces, markets, and distributes nationally a portfolio of healthy, high quality products for consumers via the retail channel. See Note 17 in our consolidated financial statements for further information.
Sales and Other Financial Information by Business Segment and Product Category
Sales and other financial information by business segment are provided in Note 11 to our consolidated financial statements that are included in this Annual Report.
Patents and Trademarks
Our trademarks include the Calavo and RFG brand name and related logos. We also utilize the following trademarks in conducting our business: Avo Fresco, Bueno, Calavo Gold, Calavo Salsa Lisa, Salsa Lisa, Celebrate the Taste, El Dorado, Fresh Ripe, Select, Taste of Paradise, The First Name in Avocados, Tico, Mfresh, Maui Fresh International, and Triggered Avocados, ProRipeVIP™, Garden Highway Fresh Cut, Garden Highway, and ProRipeVIP™.
Working Capital Requirements
Generally, we make payments to our avocado growers and other suppliers in advance of collecting all of the related accounts receivable. We generally bridge the timing between vendor payments and customer receipts by using operating cash flows and commercial bank borrowings. In addition, we provide crop loans and other advances to some of our growers, which are also funded through operating cash flows and borrowings.
Non-California sourced avocados and perishable food products often require working capital to finance the payment of advances to suppliers and collection of accounts receivable. These working capital needs are also financed through the use of operating cash flows and bank borrowings.
With respect to our CalavoFoodsCalavo Foods business, we require working capital to finance the production of our processed avocado products, building and maintaining an adequate supply of finished product, and collecting our accounts receivable balances. These working capital needs are financed through the use of operating cash flows and bank borrowings.
Backlog
Our customers do not place product orders significantly in advance of the requested product delivery dates. Customers typically order perishable products two to ten days in advance of shipment, and typically order CalavoFoodsCalavo Foods within thirty days in advance of shipment.
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Research and Development
Prior to the acquisition of RFG, we did not undertake significant research and development efforts. Research and development programs, if any, arewere limited to the continuous process of refining and developing new techniques to enhance the effectiveness and efficiency of our CalavoFoodsCalavo Foods operations and the handling, ripening, storage, and packing of fresh avocados.
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The California State Department of Food and Agriculture oversees the packing and processing of California avocados and conducts tests for fruit quality and packaging standards. All of our packages are stamped with the state seal as meeting standards. Various states have instituted regulations providing differing levels of oversight with respect to weights and measures, as well as quality standards.
As a manufacturer and marketer of processed avocado products, our operations are subject to extensive regulation by various federal government agencies, including the Food and Drug Administration (FDA), the USDA and the Federal Trade Commission (FTC), as well as state and local agencies, with respect to production processes, product attributes, packaging, labeling, storage and distribution. Under various statutes and regulations, these agencies prescribe requirements and establish standards for safety, purity and labeling. In addition, advertising of our products is subject to regulation by the FTC, and our operations are subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act. Our manufacturing facilities and products are subject to periodic inspection by federal, state and local authorities.
As a result of our agricultural and food processing activities, we are subject to numerous environmental laws and regulations. These laws and regulations govern the treatment, handling, storage and disposal of materials and waste and the remediation of contaminated properties.
We seek to comply at all times with all such laws and regulations and to obtain any necessary permits and licenses, and we are not aware of any instances of material non-compliance. We believe our facilities and practices are sufficient to maintain compliance with applicable governmental laws, regulations, permits and licenses. Nevertheless, there is no guarantee that we will be able to comply with any future laws and regulations or requirements for necessary permits and licenses. Our failure to comply with applicable laws and regulations or obtain any necessary permits and licenses could subject us to civil remedies including fines, injunctions, recalls or seizures, as well as potential criminal sanctions.
Employees
As of October 31, 2010,2011, we had 1,1571,509 employees, of which 428672 were located in the United States and 729837 were located in Mexico. We do not have a significant number of United States employees covered by a collective bargaining agreement. 603710 of Calavo’s Mexican employees are represented by a union. We consider the relationship with our employees to be good and we have never experienced a significant work stoppage.
The following is a summary of the number of “salaried” and “hourly” employees as of October 31, 2010.
| Location | Salaried | Hourly | Total | |||||||||
| United States | 116 | 312 | 428 | |||||||||
| Mexico | 126 | 603 | 729 | |||||||||
| TOTAL | 242 | 915 | 1,157 | |||||||||
Location | Salaried | Hourly | Total | |||||||||
United States | 175 | 497 | 672 | |||||||||
Mexico | 127 | 710 | 837 | |||||||||
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TOTAL | 302 | 1,207 | 1,509 | |||||||||
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Item 1A. Risk Factors
Risks Related to Our Business
We are subject to increasing competition that may adversely affect our operating results.
The market for avocados and processed avocado products is highly competitive and affects each of our businesses. Each of our businesses is subject to competitive pressures, including the following:
California avocados are impacted by an increasing volume of foreign grown avocados being imported into the United States. Recently, there have been significant plantings of avocados in Mexico, Chile, the Dominican Republic, Peru and other parts of the world, which have had, and will continue to have, the effect of increasing the volume of foreign grown avocados entering the United States market.
California avocados are subject to competition from other California avocado handlers. If we are unable to consistently pay California growers a competitive price for their avocados, these growers may choose to have their avocados marketed by alternate handlers.
Non-California sourced avocados and perishable food products are impacted by competitors operating in Mexico. Generally, handlers of Mexican grown avocados operate facilities that are substantially smaller than our facility in Uruapan, Mexico. If we are unable to pack and market a sufficient volume of Mexican grown avocados, smaller handlers will have a lower per unit cost and be able to offer Mexican avocados at a more competitive price to our customers.
Non-California sourced avocados and perishable food products are also subject to competition from other California avocado handlers that market Chilean grown avocados. If we are unable to consistently pay Chilean packers a competitive price for their avocados, these packers may choose to have their avocados marketed by alternate handlers.
We are subject to the risks of doing business internationally.
We conduct a substantial amount of business with growers and customers who are located outside the United States. We purchase avocados from foreign growers and packers, sell fresh avocados and processed avocado products to foreign customers, and operate a packinghouse and a processing plant in Mexico. In the most recent years, there has been an increase in organized crime in Mexico. This has not had an impact on our operations, but this does increase the risk of doing business in Mexico. We are also subject to regulations imposed by the Mexican government, and also to examinations by the Mexican tax authorities (See Note 8 in the consolidated financial statements). Significant changes to these government regulations and to assessments by the Mexican tax authorities can have a negative impact on our operations and operating results in Mexico. For additional information about our non-California sourced fruit, see the “Business” section included in this Annual Report.
Our current international operations are subject to a number of inherent risks, including:
Local economic and political conditions, including disruptions in trading and capital markets;
Restrictive foreign governmental actions, such as restrictions on transfers of funds and trade protection measures, including export duties and quotas and customs duties and tariffs; and
Changes in legal or regulatory requirements affecting foreign investment, loans, taxes, imports, and exports
Currency exchange fluctuations may impact the results of our operations.
Currency exchange rate fluctuations, depending upon the nature of the changes, may make our domestic-sourced products more expensive compared to foreign grown products or may increase our cost of obtaining foreign-sourced products. Because we do not hedge against our foreign currency exposure, our business has increased susceptibility to foreign currency fluctuations.
We and our growers are subject to the risks that are inherent in farming.
Our results of operations may be adversely affected by numerous factors over which we have little or no control and that are inherent in farming, including reductions in the market prices for our products, adverse weather and growing conditions, pest and disease problems, and new government regulations regarding farming and the marketing of agricultural products.
Our earnings are sensitive to fluctuations in market prices and demand for our products.
Excess supplies often cause severe price competition in our industry. Growing conditions in various parts of the world, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product.
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In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products.
Increases in commodity or raw product costs, such as fuel, packaging, and paper, could adversely affect our operating results.
Many factors may affect the cost and supply of fresh produce, including external conditions, commodity market fluctuations, currency fluctuations, changes in governmental laws and regulations, agricultural programs, severe and prolonged weather conditions and natural disasters. Increased costs for purchased fruit have in the past negatively impacted our operating results, and there can be no assurance that they will not adversely affect our operating results in the future.
The price of various commodities can significantly affect our costs. Fuel and transportation cost is a significant component of the price of much of the produce that we purchase from growers, and there can be no assurance that we will be able to pass on to our customers the increased costs we incur in these respects.
The cost of paper is also significant to us because some of our products are packed in cardboard boxes. If the price of paper increases and we are not able to effectively pass these price increases along to our customers, then our operating income will decrease.
We are subject to the risk of product liability claims.
The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.
We are subject to possible changing USDA and FDA regulations which govern the importation of foreign avocados into the United States and the processing of processed avocado products.
The USDA has established, and continues to modify, regulations governing the importation of avocados into the United States. Our permits that allow us to import foreign-sourced avocados into the United States generally are contingent on our compliance with these regulations. Our results of operations may be adversely affected if we are unable to comply with existing and modified regulations and are unable to secure avocado import permits in the future.
The FDA establishes, and continues to modify, regulations governing the production of processed avocado products, such as the new Food Safety Modernization Act, which implements mandatory preventive controls for food facilities and compliance with mandatory produce safety standards. Our results of operations may be adversely affected if we are unable to comply with these existing and modified regulations.
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We intend to review acquisition prospects that would complement our business. While we are not currently a party to any agreement with respect to any acquisitions, we may acquire other businesses in the future. Future acquisitions by us could result in accounting charges, potentially dilutive issuances of equity securities, and increased debt and contingent liabilities, any of which could have a material adverse effect on our business and the market price of our common stock. Acquisitions entail numerous risks, including the assimilation of the acquired operations, diversion of management’s attention to other business concerns, risks of entering markets in which we have limited prior experience, and the potential loss of key employees of acquired organizations. We may be unable to successfully integrate businesses or the personnel of any business that might be acquired in the future, and our failure to do so could have a material adverse effect on our business and on the market price of our common stock.
Our ability to competitively serve our customers is a function of reliable and low cost transportation. Disruption of the supply of these services and/or significant increases in the cost of these services could impact our operating income.
We use multiple forms of transportation to bring our products to market. They include ocean, truck, and air-cargo. Disruption to the timely supply of these services or dramatic increases in the cost of these services for any reason including availability of fuel for such services, labor disputes, or governmental restrictions limiting specific forms of transportation could have an adverse effect on our ability to serve our customers and consumers and could have an adverse effect on our financial performance.
We depend on our infrastructure to have sufficient capacity to handle our annual production needs.
We have an infrastructure that has sufficient capacity for our production needs, but if we lose machinery or facilities due to natural disasters or mechanical failure, we may not be able to operate at a sufficient capacity to meet our production needs. This could have a material adverse effect on our business, which could impact our results of operations and our financial condition.
We depend on our key personnel and if we lose the services of any of these individuals, or fail to attract and retain additional key personnel, we may not be able to implement our business strategy or operate our business effectively.
Our future success largely depends on the contributions of our senior management team. We believe that these individuals’ expertise and knowledge about our industry and their respective fields and their relationships with other individuals in our industry are critical factors to our continued growth and success. We do not carry key person insurance. The loss of the services of any member of our senior management team could have a material adverse effect on our business and prospects. Our success also depends upon our ability to attract and retain additional qualified sales, marketing and other personnel.
A portion of our workforce is unionized and labor disruptions could decrease our profitability.
While we believe that our relations with our employees are good, we cannot assure you that we will be able to negotiate collective bargaining agreements on favorable terms, or at all, and without production interruptions, including labor stoppages. A prolonged labor dispute, which could include a work stoppage, could have a material adverse effect on the portion of our business affected by the dispute, which could impact our business, results of operations and financial condition.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to customers, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and
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resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions have adversely affected in the past, and in the future could adversely affect, our financial results, stock price and reputation.
Risks Related to Our Common Stock
The value of our common stock may be adversely affected by market volatility.
The trading price of our common stock fluctuates and may be influenced by many factors, including:
Our operating and financial performance and prospects;
The depth and liquidity of the market for our common stock;
Investor perception of us and the industry and markets in which we operate;
Our inclusion in, or removal from, any equity market indices;
Changes in earnings estimates or buy/sell recommendations by analysts; and
General financial, domestic, international, economic and other market conditions;
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy.
The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on many factors, including:
Market acceptance of our products; and
The existence of opportunities for expansion.
If our capital resources are not sufficient to satisfy our liquidity needs, we may seek to sell additional equity or obtain additional debt financing. The sale of additional equity would result in dilution to our shareholders. Additional debt would result in increased
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our corporate headquarters building from Limoneira Company (Limoneira) located in Santa Paula, California. Additionally, we ownIn addition, RFG leases their corporate office in Ranch Cordova, California. We have numerous facilities throughout the United States, and two packinghouses and one distribution and ripening facility (our former processing facility)facilities in California, and lease one facility inMexico. See the following states: Arizona, Hawaii, New Jersey, Texas, and Minnesota. Also, we own one processing facility and one packinghouse in Mexico.
United States LocationsLocations:
Packinghouses:
Leased or Owned: | City | State | Description | |||
Owned | Santa Paula | California | Handles California, Mexican, and Chilean avocados. The facility was purchased in 1955 and has had equipment improvements substantially equivalent to our Temecula facility. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs. | |||
Owned | Temecula | California | Handles California, Mexican, and Chilean avocados. The facility was built in 1985 and has been improved in capacity and efficiency since then. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs. | |||
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Operating and Chilean growers. The Temecula, California facility was built in 1985Distributing Facilities:
Leased or Owned: | City | State | Description | |||
Owned | Santa Paula | California | Operates as a ripening, storage and shipping facility for our fresh avocado operations. Additionally, it also serves to store and ship certain processed avocado products as well. Also, effective December 2005, we sort and pack certain diversified commodities as well. We believe that the annual capacity of this facility will be sufficient to pack and ripen, if necessary, the expected annual volume of avocados and specialty commodities delivered to us. | |||
Leased | Swedesboro | New Jersey | Primarily ripens, sorts, packs, and ships avocados. Additionally, it also serves to store and ship certain tropical commodities as well. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs. | |||
Leased | Garland | Texas | Primarily ripens, sorts, packs and ships fresh avocados. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs. | |||
Leased | Nogales | Arizona | Primarily ripens, sorts, packs and ships, tomatoes, and other diversified commodities as well. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs. | |||
Leased | Hilo | Hawaii | Primarily sorts, packs, and ships papayas. We believe that the annual capacity will be sufficient to handle our budgeted annual production needs. | |||
Owned | Hilo | Hawaii | Primarily provides irradiation services for produce grown in Hawaii. We believe that the annual capacity will be sufficient to handle our budgeted annual production needs. | |||
Leased | St. Paul | Minnesota | CSL facility that produces salsa. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs. | |||
Leased | Houston | Texas | RFG facility that primarily processes cut fruits and vegetables, salads, sandwiches, and wraps. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs. | |||
Leased | Sacramento | California | RFG facility that primarily processes cut fruits and vegetables, salads, sandwiches, and wraps. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs. | |||
Mexico Locations:
Packinghouse and has been improved in capacity and efficiency since then. The Santa Paula, California facility was purchased in 1955 and has had equipment improvements substantially equivalent to our Temecula facility. We believe that the combined annual capacity of the two packinghouses, under normal workweek operations, is sufficient to pack the annually budgeted volume of California avocados delivered to us by our growers.
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Leased or Owned: | City | State | Description | |||
Owned | Uruapan | Michoacan | Our processing facility was constructed pursuant to our restructuring plan approved in February 2003 and has undergone improvements since then. We believe that the annual capacity of this facility will be sufficient to process our budgeted annual production needs. | |||
Owned | Uruapan | Michoacan | Handles avocados delivered to us by Mexican growers. The facility, which was previously leased, was built in 1985 and has been improved in capacity and efficiency since then. We believe that the annual capacity of this facility will be sufficient to process our budgeted annual production needs. | |||
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Item 3. Legal Proceedings
From time to time, we become involved in legal proceedings that are related to our business operations. We are not currently a party to any legal proceedings that could have a material adverse effect upon our financial position or results of operations.
Item 4. [Removed and Reserved.]
Executive Officers of the Registrant
The following table sets forth the name, age and position of individuals who hold positions as executive officers of our company. There are no family relationships between any director or executive officer and any other director or executive officer of our company. Executive officers are elected by the Board of Directors and serve at the discretion of the Board.
Name | Age | Position | ||||
Lecil E. Cole | ||||||
| 72 | Chairman of the Board, Chief Executive Officer and President | |||||
Arthur J. Bruno | 61 | Chief Operating Officer, Chief Financial Officer and Corporate Secretary | ||||
Robert J. Wedin | 62 | Vice President, Sales and Fresh Marketing | ||||
Alan C. Ahmer | 63 | Vice President, Processed Product Sales and Production | ||||
Michael A. Browne | 53 | Vice President, Fresh Operations | ||||
Lecil E. Colehas been a member of our board of directors since February 1982 and has served as Chairman of the Board since 1988. Mr. Cole has also served as our Chief Executive Officer and President since February 1999. He served as an executive of Safeway Stores from 1964 to 1976 and as Chairman of Central Coast Federal Land Bank from 1986 to 1996. Mr. Cole has served as Chairman and President of Hawaiian Sweet, Inc. and Tropical Hawaiian Products, Inc. since 1996. Mr. Cole farms approximately 4,400 acres in California on which avocados and cattle are produced and raised.
Arthur J. Brunohas served as our Chief Financial Officer and Corporate Secretary since October 2003. During fiscal 2004, Mr. Bruno also assumed the title and responsibilities of Chief Operating Officer. From 1988 to 2003, Mr. Bruno served as the president and co-founder of Maui Fresh International, Inc. Mr. Bruno is a Certified Public Accountant.
Robert J. Wedinhas served as our Vice President since 1993. Mr. Wedin joined us in 1973 at our then Santa Barbara packinghouse. Beginning in 1990, Mr. Wedin served as a director of the California Avocado Commission for a period of ten years. Mr. Wedin currently is a board member of Producesupply.org and serves as a member of that organization’s executive committee.
Alan C. Ahmerhas served as our Vice President since 1989. Mr. Ahmer joined us in 1979 as a regional sales manager in our CalavoFoodsCalavo Foods business. In September 2003, Mr. Ahmer’s new title became Vice-President, CalavoFoodsCalavo Foods Sales and Production.
Michael A. Brownehas served as our Vice President since 2005. From 1997 until joining us, Mr. Browne served as the founder and co-owner of Fresh Directions International, a closely held multinational fresh produce company, which marketed fresh avocados from Mexico, Chile, and the Dominican Republic. Mr. Browne joined us in May 2005.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
In March 2002, our common stock began trading on the OTC Bulletin Board under the symbol “CVGW.” In July 2002, our common stock began trading on the Nasdaq National Market under the symbol “CVGW” and currently trades on the Nasdaq Global Select Market.
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| Fiscal 2010 | High | Low | ||||||
| First Quarter | $ | 18.58 | $ | 14.99 | ||||
| Second Quarter | $ | 18.74 | $ | 15.85 | ||||
| Third Quarter | $ | 21.06 | $ | 15.25 | ||||
| Fourth Quarter | $ | 21.83 | $ | 18.68 | ||||
| Fiscal 2009 | High | Low | ||||||
| First Quarter | $ | 13.34 | $ | 5.93 | ||||
| Second Quarter | $ | 14.49 | $ | 10.22 | ||||
| Third Quarter | $ | 20.01 | $ | 11.82 | ||||
| Fourth Quarter | $ | 20.30 | $ | 16.29 | ||||
Fiscal 2011 | High | Low | ||||||
First Quarter | $ | 23.80 | $ | 20.99 | ||||
Second Quarter | $ | 23.55 | $ | 19.70 | ||||
Third Quarter | $ | 21.74 | $ | 18.70 | ||||
Fourth Quarter | $ | 22.88 | $ | 17.90 | ||||
Fiscal 2010 | High | Low | ||||||
First Quarter | $ | 18.58 | $ | 14.99 | ||||
Second Quarter | $ | 18.74 | $ | 15.85 | ||||
Third Quarter | $ | 21.06 | $ | 15.25 | ||||
Fourth Quarter | $ | 21.83 | $ | 18.68 | ||||
As of November 30, 2010,2011, there were approximately 1,0951,042 stockholders of record of our common stock.
During the year ended October 31, 2010,2011, we did not issue any shares of common stock that were not registered under the Securities Act of 1933, and weexcept for the shares issued with the acquisition of RFG, which is discussed in Note 17 of the Consolidated Financial Statements. We did not repurchase any shares of our common stock.
Dividend Policy
Our dividend policy is to provide for an annual dividend payment, as determined by the Board of Directors. We anticipate paying dividends in the first quarter of our fiscal year.
On December 12, 2011, we paid a $0.55 per share dividend in the aggregate amount of $8,123,000 to shareholders of record on December 2, 2011.
On December 13, 2010, we paid a $0.55 per share dividend in the aggregate amount of $8,092,000 to shareholders of record on December 1, 2010.
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Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data (other than pounds information) for each of the years in the five-year period ended October 31, 20102011 are derived from the audited consolidated financial statements of Calavo Growers, Inc.
Historical results are not necessarily indicative of results that may be expected in any future period. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto that are included elsewhere in this Annual Report.
| Fiscal Year Ended October 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Income Statement Data: (1)(2) | ||||||||||||||||||||
| Net sales | $ | 398,351 | $ | 344,765 | $ | 361,474 | $ | 302,984 | $ | 273,723 | ||||||||||
| Gross margin | 51,530 | 44,533 | 33,181 | 31,772 | 29,084 | |||||||||||||||
| Net income | 17,640 | 13,611 | 7,725 | 7,330 | 5,788 | |||||||||||||||
| Basic net income per share | $ | 1.22 | $ | 0.94 | $ | 0.54 | $ | 0.51 | $ | 0.40 | ||||||||||
| Diluted net income per share | $ | 1.22 | $ | 0.94 | $ | 0.53 | $ | 0.51 | $ | 0.40 | ||||||||||
Balance Sheet Data as of End of Period: | ||||||||||||||||||||
| Working capital | $ | 14,801 | $ | 12,052 | $ | 15,413 | $ | 16,334 | $ | 12,023 | ||||||||||
| Total assets | 150,198 | 122,749 | 134,422 | 127,920 | 107,563 | |||||||||||||||
| Current portion of long-term obligations | 1,369 | 1,366 | 1,362 | 1,307 | 1,308 | |||||||||||||||
| Long-term debt, less current portion | 6,089 | 13,908 | 25,351 | 13,106 | 10,406 | |||||||||||||||
| Shareholders’ equity | 88,257 | 69,487 | 65,517 | 74,003 | 58,943 | |||||||||||||||
Cash Flows Provided by (Used in): | ||||||||||||||||||||
| Operations | $ | 18,198 | $ | 21,997 | $ | 5,296 | $ | 4,629 | $ | 7,819 | ||||||||||
| Investing(3) | (7,721 | ) | (5,990 | ) | (7,454 | ) | (7,950 | ) | (4,663 | ) | ||||||||||
| Financing | (10,288 | ) | (16,641 | ) | 2,700 | 4,238 | (4,239 | ) | ||||||||||||
Other Data: | ||||||||||||||||||||
| Dividends declared per share | $ | 0.55 | $ | 0.50 | $ | 0.35 | $ | 0.35 | $ | 0.32 | ||||||||||
| Net book value per share | $ | 6.04 | $ | 4.79 | $ | 4.52 | $ | 5.15 | $ | 4.12 | ||||||||||
| Pounds of California avocados sold | 170,650 | 53,000 | 92,165 | 91,038 | 218,460 | |||||||||||||||
| Pounds of non-California avocados sold | 123,700 | 162,950 | 123,740 | 135,723 | 70,063 | |||||||||||||||
| Pounds of processed avocados products sold | 21,651 | 21,259 | 22,274 | 22,556 | 20,489 | |||||||||||||||
| Fiscal Year Ended October 31, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Income Statement Data: (1)(2) | ||||||||||||||||||||
Net sales | $ | 522,529 | $ | 398,351 | $ | 344,765 | $ | 361,474 | $ | 302,984 | ||||||||||
Gross margin | 42,861 | 51,530 | 44,533 | 33,181 | 31,772 | |||||||||||||||
Net income | 10,954 | 17,640 | 13,611 | 7,725 | 7,330 | |||||||||||||||
Basic net income per share | $ | 0.75 | $ | 1.22 | $ | 0.94 | $ | 0.54 | $ | 0.51 | ||||||||||
Diluted net income per share | $ | 0.75 | $ | 1.22 | $ | 0.94 | $ | 0.53 | $ | 0.51 | ||||||||||
Balance Sheet Data as of End of Period(1): | ||||||||||||||||||||
Working capital | $ | 8,642 | $ | 14,801 | $ | 12,052 | $ | 15,413 | $ | 16,334 | ||||||||||
Total assets | 185,323 | 150,198 | 122,749 | 134,422 | 127,920 | |||||||||||||||
Current portion of long-term obligations | 5,448 | 1,369 | 1,366 | 1,362 | 1,307 | |||||||||||||||
Long-term debt, less current portion | 18,244 | 6,089 | 13,908 | 25,351 | 13,106 | |||||||||||||||
Shareholders’ equity | 95,780 | 88,257 | 69,487 | 65,517 | 74,003 | |||||||||||||||
Cash Flows Provided by (Used in): | ||||||||||||||||||||
Operations | $ | 7,866 | $ | 19,979 | $ | 22,504 | $ | 5,296 | $ | 4,629 | ||||||||||
Investing(1)(3) | (20,907 | ) | (9,502 | ) | (6,497 | ) | (7,454 | ) | (7,950 | ) | ||||||||||
Financing | 14,751 | (10,288 | ) | (16,641 | ) | 2,700 | 4,238 | |||||||||||||
Other Data: | ||||||||||||||||||||
Dividends declared per share | $ | 0.55 | $ | 0.55 | $ | 0.50 | $ | 0.35 | $ | 0.35 | ||||||||||
Net book value per share | $ | 6.52 | $ | 6.04 | $ | 4.79 | $ | 4.52 | $ | 5.15 | ||||||||||
Pounds of California avocados sold | 84,913 | 170,650 | 53,000 | 92,165 | 91,038 | |||||||||||||||
Pounds of non-California avocados sold | 156,973 | 123,700 | 162,950 | 123,740 | 135,723 | |||||||||||||||
Pounds of processed avocados products sold | 18,811 | 21,651 | 21,259 | 22,274 | 22,556 | |||||||||||||||
| (1) | Operating results for fiscal 2011 and balance sheet data as of end of period include the acquisition of RFG from the date of acquisition of June 1, 2011. For fiscal year 2011, RFG net sales, gross margins, and net income before taxes were $56.7 million, $4.3 million and $1.2 million. We have paid the Sellers $14.2 million in cash, net of adjustments based on RFG’s financial condition at closing. See Note 17 to our consolidated financial statements for further discussion of this acquisition. |
| (2) | Operating results for fiscal 2011 and 2010 include the acquisitions of | |
| (3) | For fiscal |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto that appear elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under “Risks related to our business” included in Item 1A and elsewhere in this Annual Report.
Overview
We are a leader in the distribution of avocados, prepared avocado products, and other perishable food products throughout the United States. Our history and expertise in handling California grown avocados has allowed us to develop a reputation of delivering quality products, at competitive prices, while providing competitive returns to our growers. This reputation has enabled us to expand our product offerings to include avocados sourced on an international basis, prepared avocado products, and other perishable foods. We report our operations in two different business segments: (1) Fresh products and (2) CalavoFoods.Calavo Foods. See Note 11 to our consolidated financial statements for further discussion.
Our Fresh products business grades, sizes, packs, cools, and ripens (if desired) avocados for delivery to our customers. We presently operate two packinghouses and three packinghouses in Southern California.operating and distributing facilities that handle avocados across the United States. These packinghouses handled approximately 30%28% of the California avocado crop during the 20102011 fiscal year, based on data obtained from the California Avocado Commission. Our operating results and the returns we pay our growers are highly dependent on the volume of avocados delivered to our packinghouses, as a significant portion of our costs areis fixed. Our strategy calls for continued efforts to retain and recruit growers that meet our business model. Additionally, our Fresh products business also procures avocados grown in Chile, Mexico and Peru, as well as other various commodities, including tomatoes, papayas, mushrooms, and pineapples. We operate a packinghouse in Mexico that, together with certain co-packers that we frequently purchase fruit from, handled approximately 21%23% of the Mexican avocado crop bound for the United States market and approximately 5% of the avocados exported from Mexico to countries other than the United States during the 2009-20102010-2011 Mexican season, based on our estimates. Additionally, during the 2009-20102010-2011 Chilean avocado season, we handled approximately 5% of the Chilean avocado crop, based on our estimates. Our strategy is to increase our market share of currently sourced avocados to all accepted marketplaces. We believe our diversified avocado sources provides a level of supply stability that may, over time, help solidify the demand for avocados among consumers in the United States and elsewhere in the world. We believe our efforts in distributing our other various commodities, such as those shown above, complement our offerings of avocados. From time to time, we continue to explore distribution of other crops that provide reasonable returns to the business.
Our CalavoFoodsCalavo Foods business procures avocados, processes avocados into a wide variety of guacamole products, and distributes the processed product to our customers. All of our prepared avocado products are now “cold pasteurized” and include both frozen and fresh guacamole. Additionally, we also prepare various fresh salsa products. Customers include both food service industry and retail businesses. Due to the long shelf-life of our frozen guacamole and the purity of our fresh guacamole, we believe that we are well positioned to address the diverse taste and needs of today’s customers. Additionally, we also prepare various fresh salsa products and ready-to-eat produce and deli products. See Note 16 and Note 17 for additional information related to the acquisitions of CSL and RFG. Customers include both food service industry and retail businesses. We continue to seek to expand our relationships with major food service companies and develop alliances that will allow our products to reach a larger percentage of the marketplace.
Net sales of frozen products represented approximately 54%51% and 53%54% of total processed segment sales for the years ended October 31, 20102011 and 2009.2010. Net sales of our ultra high pressure products represented approximately 46%49% and 47%46% of total processed segment sales for the years ended October 31, 20102011 and 2009.
The operating results of all of our businesses including our CalavoFoods business, have been, and will continue to be, affected by quarterly and annual fluctuations and market downturns due to a number of factors, such as pests and disease, weather patterns, changes in demand by consumers, the timing of the receipt, reduction, or cancellation of significant customer orders, the gain or loss of significant customers, market acceptance of our products, our ability to develop, introduce, and market new products on a timely basis, availability and cost of avocados and supplies from growers and vendors, new product introductions by our competitors, change in the mix of avocados and CalavoFoodsCalavo Foods we sell, and general economic conditions. We believe, however, that we are currently positioned to address these risks and deliver favorable operating results for the foreseeable future.
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Recent Developments
Dividend Payment
On December 13, 2010,12, 2011, we paid a $0.55 per share dividend in the aggregate amount of $8,092,000$8,123,000 to shareholders of record on December 1, 2010.
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Hacienda Suits— We are currently under examination by the Mexican tax authorities (Hacienda) for the tax yearyears ended December 31, 2000. We have2004, and 2005.
During the third quarter of fiscal year 2011, we received an assessment totaling approximately $2.0 millionupdate from Hacienda related toour outside legal counsel regarding the amountexamination of income at our Mexican subsidiary. Subsequent to that initial assessment, the Hacienda offered a settlement of approximately $400,000, which we declined. In the second quarter of 2009, we won our appeal case. The Hacienda subsequently appealed that decision and the case was sent back to the tax court due to administrative error by such jurisdiction. During the second quarter of 2010, we once again won our appeal and, once again, the Hacienda appealed the decision and the case has been sent back to the tax court. We do not believe that the resolution of this examination will have a significant impact on our results of operations.
In the first quarter of fiscal 2011, we received an assessment totaling approximately $720,000 related to the tax year ended December 31, 2005. This assessment relates to depreciation expense taken on suchour 2005 tax return. Based on discussions with legal counsel, we believe that the Hacienda’s position is without merit and do not believe that the resolution of this examination will have a significant impact on our results of operations.
The Hacienda has concluded their examination for the year ended December 31, 2007, noting no changes. In addition, during the fourth quarter of fiscal 2011, the examination of the tax year ended December 31, 2000 was settled by the court in our CalavoFoods building located in Uruapan, Michoacan, Mexico as collateral tofavor.
RFG acquisition
Calavo, CG Mergersub LLC (Newco), Renaissance Food Group, LLC (RFG) and Liberty Fresh Foods, LLC, Kenneth Catchot, Cut Fruit, LLC, James Catchot, James Gibson, Jose O. Castillo, Donald L. Johnson and RFG Nominee Trust (collectively, the Hacienda in regards to these assessments.
Pursuant to the Acquisition Agreement and based on the fair value of Calavo’s common stock on June 1, 2011, we agreed to pay on the closing date approximately $16 million, payable in a combination of cash and shares of unregistered Calavo common stock, as described below in greater detail. In addition, if RFG attains specified financial goals for certain 12-month periods prior to the fifth anniversary of the closing, we have agreed to pay RFG up to an additional approximate $84 million in earn-out consideration, based on the fair value of Calavo’s common stock on June 1, 2011, payable in cash and shares of unregistered Calavo common stock, as described below in greater detail. As a result, if the maximum earn-out consideration is earned, the total consideration payable to RFG pursuant to the Acquisition Agreement could be approximately $100 million. The fair value of consideration is currently being determined by the Company and will be less than the maximum consideration noted above.
The Acquisition Agreement contains covenants, representations and warranties of Calavo and RFG that are customary for transactions of this type. Prior to entering into the Acquisition Agreement, and other than with respect to the Acquisition Agreement, neither we, nor any of our officers, directors, or affiliates had any material relationship with RFG or the Sellers.
We have paid the Sellers $14.2 million in cash, net of adjustments based on RFG’s financial condition at closing, and issued the Sellers 43,000 shares of unregistered Calavo common stock.
If RFG’s earnings before interest, taxes, depreciation and amortization (EBITDA) for any 12-month period commencing after the closing date and ending prior to the fifth anniversary of the closing date, are equal to or greater than $8 million, and RFG has concurrently reached a corresponding revenue achievement, we have agreed to pay the Sellers $5 million in cash and to issue to the Sellers 827,000 shares of unregistered Calavo common stock, representing total consideration of approximately $24 million. This
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represents the maximum that can be awarded pursuant to the 1st earn-out payment. In the event that the maximum EBITDA and revenue achievements have not been reached within five years after the closing date, but RFG’s 12-month EBITDA during such period equals or exceeds $6 million and RFG has concurrently reached a corresponding revenue achievement, a sliding-scale, as defined, will be used to calculate payment. The minimum amount to be paid in the sliding-scale related to the 1st earn-out payment is approximately $14 million, payable in both cash and shares of unregistered Calavo common stock. RFG has five years to achieve any consideration pursuant to the 1st earn-out payment.
Assuming that the maximum earn-out payment has been achieved in the 1st earn-out payment, if RFG’s EBITDA, for a 15-month period commencing after the closing date and ending prior to the fifth anniversary of the closing date, is equal to or greater than $15 million for each of the 12-month periods therein, and RFG has concurrently reached a corresponding revenue achievement, we have agreed to pay the Sellers $50 million in cash and to issue to the Sellers 434,783 shares of unregistered Calavo common stock, representing total consideration of approximately $60 million. This represents the maximum that can be awarded pursuant to the 2nd earn-out payment. In the event that the maximum EBITDA and revenue achievements have not been reached within five years after the closing date, but RFG’s 12-month EBITDA during such period equals or exceeds $10 million, and RFG has concurrently reached a corresponding revenue achievement, a sliding-scale will be used to calculate payment. The minimum amount to be paid in the sliding-scale related to the 2nd earn-out payment is approximately $27 million, payable in both cash and shares of unregistered Calavo common stock. RFG has five years to achieve any consideration pursuant to the 2nd earn-out payment.
The following table summarizes the estimated fair values of the assets acquired, liabilities assumed, and equity issued at the date of LSC. Elizabeth Nicholsonacquisition (in thousands). We obtained third-party valuations for the long-term assets acquired and Eric Nicholson, through LSC, hold the remaining 35 percent ownership of Calavo Salsa Lisa. LSC is a regional producerincurred approximately $0.3 million in acquisition costs, which have been expensed in selling, general and administrative expenses in the upper Midwestperiod incurred. For the two months ended July 31, 2011, since the acquisition of Salsa Lisa refrigerated salsas. We believe that this new lineRFG, total selling, general and administrative expenses for RFG was $1.2 million.
At June 1, 2011
Current assets | $ | 10,491 | ||
Property, plant, and equipment | 4,580 | |||
Goodwill | 14,264 | |||
Other assets | 117 | |||
Intangible assets | 8,690 | |||
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| |||
Total assets acquired | 38,142 | |||
Current liabilities | (12,292 | ) | ||
Contingent consideration | (7,774 | ) | ||
Long-term obligations | (2,894 | ) | ||
Additional paid-in capital | (952 | ) | ||
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| |||
Net non-cash assets acquired | $ | 14,230 | ||
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Of the $8,690,000 of salsas will further diversify our product offeringsintangible assets, $7,400,000 was assigned to customer relationships with a life of 8 years, $920,000 to trademarks and trade names with a life of 8 years, $200,000 to non-competition agreements with a life of 5 years, and $170,000 to trade secrets with a life of 3 years. As discussed above, we will be required to pay a natural complement to our ultra-high-pressure guacamole,maximum of approximately $100 million if RFG achieves specified revenue targets. The fair value of this contingent consideration was determined based on a probability weighted method, which incorporates management’s forecasted revenue, and the likelihood of the revenue targets being achieved.
Term Revolving Credit Agreements and Term Loan Agreements
Effective May 31, 2011, the Company and Farm Credit West, PCA (FCW), entered into a Term Revolving Credit Agreement (Revolving Agreement). Under the terms of the Revolving Agreement, we are advanced funds for working capital purposes, the purchase and installation of capital items, as well as other corporate needs of the Company. Total credit available under the borrowing agreement is $40 million, up from $30 million, and expires on February 1, 2016. This increase was at our recently introduced Calavo tortilla chips. See Note 16request and not due to any immediate cash flows needs.
Effective September 30, 2011, the Company and Bank of America, N.A. (BoA), entered into an agreement, Amendment No. 4 to Loan Agreement (the Agreement), which amended our existing credit facility with BoA. Under the terms of the Agreement, we are advanced funds primarily for working capital purposes. Total credit available under the borrowing agreement is now $25 million, up from $15 million and now expires on February 1, 2016. This increase was at our request and not due to any immediate cash flows needs.
In addition, the Agreement includes a variable rate term loan in our consolidatedthe amount of approximately $7.1 million dollars. These proceeds were used to retire approximately 50% of the outstanding balance (as of September 30, 2011) of the term loan owed to FCW related to the purchase of RFG (see discussion below). This effectively split the funding of the amounts due at closing for that acquisition between both banks. The credit facility and term loan contain various financial statementscovenants, the most significant relating to Tangible Net Worth (as defined), Fixed Charge Coverage Ratio (as defined) and Current Ratio (as defined).
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Effective May 31, 2011, the Company and FCW entered into a Term Loan Agreement (Term Agreement). Under the terms of the Term Agreement, we were advanced $15 million for further information.
The Term Agreement contain various financial covenants, the most significant relating to tangible net worth (as defined), Fixed Charge Coverage Ratio (as defined) and Current Ratio (as defined).
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
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Management has discussed the development and selection of critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting estimates in this Annual Report.
We believe the following are the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Promotional allowances.We provide for promotional allowances at the time of sale, based on our historical experience. Our estimates are generally based on evaluating the relationship between promotional allowances and gross sales. The derived percentage is then applied to the current period’s sales revenues in order to arrive at the appropriate debit to sales allowances for the period. The offsetting credit is made to accrued liabilities. When certain amounts of specific customer accounts are subsequently identified as promotional, they are written off against this allowance. Actual amounts may differ from these estimates and such differences are recognized as an adjustment to net sales in the period they are identified. A 1% change in the derived percentage for the entire year would impact results of operations by approximately $0.5 million.
Income Taxes.We account for deferred tax liabilities and assets for the future consequences of events that have been recognized in our consolidated financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of our assets and liabilities result in a deferred tax asset, we perform an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, the liability will be reversed and we will recognize a tax benefit during the period in which it is determined the liability no longer applies. Conversely, we record additional tax charges in a period in which it is determined that a recorded tax liability is less than the ultimate assessment is expected to be.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from management’s estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.
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Goodwill and acquired intangible assets. Goodwill, defined as unidentified asset(s) acquired in conjunction with a business acquisition, is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. Goodwill impairment testing is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test would be unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. 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. The estimates and assumptions described above, along with other factors such as discount rates, will significantly affect the outcome of the impairment tests and the amounts of any resulting impairment losses. We performed our annual assessment of goodwill and determined that no impairment existed as of October 31, 2010.
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Results of Operations
The following table sets forth certain items from our consolidated statements of income, expressed as percentages of our total net sales, for the periods indicated:
| Year ended October 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Gross margins | 12.9 | % | 12.9 | % | 9.2 | % | ||||||
| Selling, general and administrative | 5.8 | % | 6.6 | % | 5.8 | % | ||||||
| Operating income | 7.1 | % | 6.3 | % | 3.4 | % | ||||||
| Interest income | 0.1 | % | 0.1 | % | 0.1 | % | ||||||
| Interest expense | (0.2 | )% | (0.3 | )% | (0.4 | )% | ||||||
| Other income, net | 0.1 | % | 0.1 | % | 0.2 | % | ||||||
| Net income | 4.4 | % | 3.9 | % | 2.1 | % | ||||||
| Year ended October 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross margins | 8.2 | % | 12.9 | % | 12.9 | % | ||||||
Selling, general and administrative | 4.7 | % | 5.8 | % | 6.6 | % | ||||||
Operating income | 3.5 | % | 7.1 | % | 6.3 | % | ||||||
Interest income | 0.0 | % | 0.1 | % | 0.1 | % | ||||||
Interest expense | (0.2 | )% | (0.2 | )% | (0.3 | )% | ||||||
Other income, net | 0.0 | % | 0.1 | % | 0.1 | % | ||||||
Net income | 2.1 | % | 4.4 | % | 3.9 | % | ||||||
Net Sales
We believe that the fundamentals for our products continue to be favorable. Firstly, Americans are eating more avocados. Over the last 10 years, United States (U.S.) consumption of avocados has expanded at a compounded annual growth rate of 7.3%7% and we do not anticipate this growth significantly changing. We believe that the healthy eating trend that has been developing in the United States contributes to such growth, as avocados, which are cholesterol and sodium free, are dense in fiber, vitamin B6, antioxidants, potassium, folate, and contain unsaturated fat, which help lower cholesterol. Also, a growing number of research studies seem to suggest that phytonutrients, which avocados are rich in, help fight chronic illnesses, such as heart disease and cancer.
Additionally, we believe that the demographic changes in the U.S. will greatly impact the consumption of avocados and avocado-based products. The Hispanic community currently accounts for approximately 16% of the U.S. population, and the total number of Hispanics is estimated to triple by the year 2050. Avocados are considered a staple item purchased by Hispanic consumers, as the per-capita avocado consumption in Mexico is estimated to be more than seven-fold that of the U.S.
We anticipate avocado products will further penetrate the United States marketplace driven by year-round availability of fresh avocados due to imports, a rapid growing Hispanic population, and the promotion of the health benefits of avocados. As the largest marketer of avocado products in the United States, we believe that we are well positioned to leverage this trend and to grow all segments of our business. Additionally, we also believe that avocados and avocado based products will further penetrate other marketplaces that we currently operate in, as interest in avocados continues to expand.
In October 2002, the USDA announced the creation of a Hass Avocado Board to promote the sale of Hass variety avocados in the U.S. marketplace. This board provides a basis for a unified funding of promotional activities based on an assessment on all avocados
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sold in the U.S. marketplace. The California Avocado Commission, which receives its funding from California avocado growers, has historically shouldered the promotional and advertising costs supporting avocado sales. We believe that the incremental funding of promotional and advertising programs in the U.S. will, in the long term, positively impact average selling prices and will favorably impact our avocado businesses. During fiscal 2011, 2010 2009 and 2008,2009, on behalf of avocado growers, we remitted approximately $1.8 million, $2.0 million $0.6 million and $2.2$0.6 million to the California Avocado Commission. During fiscal 2011, 2010 2009 and 2008,2009, we remitted approximately $4.8 million, $5.6 million $3.8 million and $4.2$3.8 million to the Hass Avocado Board related to avocados.
Additionally, through the acquisition of RFG, we substantially expanded and accelerated the company’s presence in the fast-growing refrigerated fresh packaged foods category through an array of retail product lines for produce, deli, meat and food service departments.
We also believe that our diversified fresh products, specifically tomatoes and papayas, are positioned for future growth and expansion.
The tomato is the fourth most popular fresh-market vegetable behind potatoes, lettuce, and onions in the United States. Although stabilizing in the first decade of the 2000s, annual average fresh-market tomato consumption remains well above that of the previous decade. Over the past few decades, per capita use of tomatoes has been on the rise due to the enduring popularity of salads, salad bars, and bacon-lettuce-tomato and submarine sandwiches. Perhaps of greater importance has been the introduction of improved tomato varieties, heightened consumer interest in a wider range of tomatoes, a surge of new immigrants who eat vegetable-intensive diets, and expanding national emphasis on health and nutrition.
Papayas have become more popular as the consumption in the United States has more than doubled in the past decade. Papayas have high nutritional benefits. They are rich in Anti-oxidants, the B vitamins, folate and pantothenic acid; and the minerals, potassium and magnesium; and fiber. Together, these nutrients promote the health of the cardiovascular system and also provide protection against colon cancer.
Sales of products and related costs of products sold are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Service revenue, including freight, ripening, storage, bagging and palletization charges, is recorded when services are performed and sales of the related products are delivered. We provide for sales returns and promotional allowances at the time of shipment, based on our experience.
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| Year ended October 31, 2010 | Year ended October 31, 2009 | |||||||||||||||||||||||
| Fresh | Calavo- | Fresh | Calavo- | |||||||||||||||||||||
| products | Foods | Total | products | Foods | Total | |||||||||||||||||||
| Third-party sales: | ||||||||||||||||||||||||
| Avocados | $ | 287,808 | $ | — | $ | 287,808 | $ | 259,558 | $ | — | $ | 259,558 | ||||||||||||
| Tomatoes | 41,595 | — | 41,595 | 14,067 | — | 14,067 | ||||||||||||||||||
| Papayas | 11,278 | — | 11,278 | 9,118 | — | 9,118 | ||||||||||||||||||
| Pineapples | 3,838 | — | 3,838 | 13,341 | — | 13,341 | ||||||||||||||||||
| Other Fresh products | 3,617 | — | 3,617 | 4,219 | — | 4,219 | ||||||||||||||||||
| CalavoFoods — food service | — | 40,654 | 40,654 | — | 36,493 | 36,493 | ||||||||||||||||||
| CalavoFoods — retail and club | — | 17,473 | 17,473 | — | 15,554 | 15,554 | ||||||||||||||||||
| Total gross sales | 348,136 | 58,127 | 406,263 | 300,303 | 52,047 | 352,350 | ||||||||||||||||||
| Less sales incentives | (84 | ) | (7,828 | ) | (7,912 | ) | (68 | ) | (7,517 | ) | (7,585 | ) | ||||||||||||
| Net sales | $ | 348,052 | $ | 50,299 | $ | 398,351 | $ | 300,235 | $ | 44,530 | $ | 344,765 | ||||||||||||
| Year ended October 31, 2009 | Year ended October 31, 2008 | |||||||||||||||||||||||
| Fresh | Calavo- | Fresh | Calavo- | |||||||||||||||||||||
| products | Foods | Total | products | Foods | Total | |||||||||||||||||||
| Third-party sales: | ||||||||||||||||||||||||
| Avocados | $ | 259,558 | $ | — | $ | 259,558 | $ | 268,674 | $ | — | $ | 268,674 | ||||||||||||
| Tomatoes | 14,067 | — | 14,067 | 19,666 | — | 19,666 | ||||||||||||||||||
| Papayas | 9,118 | — | 9,118 | 8,392 | — | 8,392 | ||||||||||||||||||
| Pineapples | 13,341 | — | 13,341 | 16,442 | — | 16,442 | ||||||||||||||||||
| Other Fresh products | 4,219 | — | 4,219 | 2,564 | — | 2,564 | ||||||||||||||||||
| CalavoFoods — food service | — | 36,493 | 36,493 | — | 38,919 | 38,919 | ||||||||||||||||||
| CalavoFoods — retail and club | — | 15,554 | 15,554 | — | 14,634 | 14,634 | ||||||||||||||||||
| Total gross sales | 300,303 | 52,047 | 352,350 | 315,738 | 53,553 | 369,291 | ||||||||||||||||||
| Less sales incentives | (68 | ) | (7,517 | ) | (7,585 | ) | (71 | ) | (7,746 | ) | (7,817 | ) | ||||||||||||
| Net sales | $ | 300,235 | $ | 44,530 | $ | 344,765 | $ | 315,667 | $ | 45,807 | $ | 361,474 | ||||||||||||
| Year ended October 31, 2011 | Year ended October 31, 2010 | |||||||||||||||||||||||
| Fresh products | Calavo Foods(1) | Total | Fresh products | Calavo Foods | Total | |||||||||||||||||||
Third-party sales: | ||||||||||||||||||||||||
Avocados | $ | 376,104 | $ | — | $ | 376,104 | $ | 287,808 | $ | — | $ | 287,808 | ||||||||||||
Tomatoes | 23,903 | — | 23,903 | 41,595 | — | 41,595 | ||||||||||||||||||
Papayas | 13,245 | — | 13,245 | 11,278 | — | 11,278 | ||||||||||||||||||
Pineapples | 4,278 | — | 4,278 | 3,838 | — | 3,838 | ||||||||||||||||||
Other Fresh products | 3,276 | — | 3,276 | 3,617 | — | 3,617 | ||||||||||||||||||
Calavo Foods - food service | — | 37,431 | 37,431 | — | 40,654 | 40,654 | ||||||||||||||||||
Calavo Foods - retail and club(1) | — | 73,924 | 73,924 | — | 17,473 | 17,473 | ||||||||||||||||||
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Total gross sales | 420,806 | 111,355 | 532,161 | 348,136 | 58,127 | 406,263 | ||||||||||||||||||
Less sales incentives | (148 | ) | (9,484 | ) | (9,632 | ) | (84 | ) | (7,828 | ) | (7,912 | ) | ||||||||||||
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Net sales | $ | 420,658 | $ | 101,871 | $ | 522,529 | $ | 348,052 | $ | 50,299 | $ | 398,351 | ||||||||||||
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| Year ended October 31, 2010 | Year ended October 31, 2009 | |||||||||||||||||||||||
| Fresh products | Calavo Foods | Total | Fresh products | Calavo Foods | Total | |||||||||||||||||||
Third-party sales: | ||||||||||||||||||||||||
Avocados | $ | 287,808 | $ | — | $ | 287,808 | $ | 259,558 | $ | — | $ | 259,558 | ||||||||||||
Tomatoes | 41,595 | — | 41,595 | 14,067 | — | 14,067 | ||||||||||||||||||
Papayas | 11,278 | — | 11,278 | 9,118 | — | 9,118 | ||||||||||||||||||
Pineapples | 3,838 | — | 3,838 | 13,341 | — | 13,341 | ||||||||||||||||||
Other Fresh products | 3,617 | — | 3,617 | 4,219 | — | 4,219 | ||||||||||||||||||
Calavo Foods - food service | — | 40,654 | 40,654 | — | 36,493 | 36,493 | ||||||||||||||||||
Calavo Foods - retail and club | — | 17,473 | 17,473 | — | 15,554 | 15,554 | ||||||||||||||||||
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Total gross sales | 348,136 | 58,127 | 406,263 | 300,303 | 52,047 | 352,350 | ||||||||||||||||||
Less sales incentives | (84 | ) | (7,828 | ) | (7,912 | ) | (68 | ) | (7,517 | ) | (7,585 | ) | ||||||||||||
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Net sales | $ | 348,052 | $ | 50,299 | $ | 398,351 | $ | 300,235 | $ | 44,530 | $ | 344,765 | ||||||||||||
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| (1) | Includes net sales of $56.7 million in fiscal 2011 related to the recently acquired business Renaissance Food Group, LLC (RFG). See Note 17 for additional information related to the acquisition of RFG. |
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Net sales to third parties by segment exclude inter-segment sales and cost of sales. For fiscal years 2011, 2010, and 2009, inter-segment sales and cost of sales for Fresh products totaling $15.8 million, $11.7 million and $14.1 million were eliminated. For fiscal years 2011, 2010, and 2009, inter-segment sales and cost of sales for Calavo Foods totaling $34.3 million $9.4 million, and $7.8 million were eliminated.
The following table summarizes our net sales by business segment:
| 2011 | Change | 2010 | Change | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Net sales: | ||||||||||||||||||||
Fresh products | $ | 420,658 | 20.9 | % | $ | 348,052 | 15.9 | % | $ | 300,235 | ||||||||||
Calavo Foods(1) | 101,871 | 102.5 | % | 50,299 | 13.0 | % | 44,530 | |||||||||||||
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Total net sales | $ | 522,529 | 31.2 | % | $ | 398,351 | 15.5 | % | $ | 344,765 | ||||||||||
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As a percentage of net sales: | ||||||||||||||||||||
Fresh products | 80.5 | % | 87.4 | % | 87.1 | % | ||||||||||||||
Calavo Foods | 19.5 | % | 12.6 | % | 12.9 | % | ||||||||||||||
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| 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
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| (1) | Includes net sales of $56.7 million in fiscal 2011 related to recently acquired RFG. See Note 17 in the Notes to the Consolidated Condensed Financial Statements for additional information related to the acquisition of RFG. |
Net sales for the year ended October 31, 2011, when compared to 2010, increased by $124.2 million, or 31.2%, principally as a result of an increase in both our Fresh products and Calavo Foods segments.
While the procurement of fresh avocados related to our Fresh products segment is very seasonal, our Calavo Foods business is generally not subject to a seasonal effect. The significant increase in sales of our Calavo Foods business for the year ended October 31, 2011, when compared to 2010, is primarily related to the sales of our newly acquired business, RFG, on June 1, 2011. This increase was partially offset, however, by a decrease in sales related to our guacamole products. This was primarily due to a decrease in total pounds of product sold.
Net sales to third parties by segment exclude value-added services billed by our Uruapan packinghouse and our Uruapan processing plant to the parent company. For fiscal years 2010, 2009, and 2008, inter-segmentAll intercompany sales and costare eliminated in our consolidated results of sales for operations.
Fresh products totaling $11.7 million, $14.1 million and $13.9 million were eliminated. For fiscal years 2010, 2009, and 2008, inter-segment sales and cost of sales for CalavoFoods totaling $9.4 million $7.8 million, and $9.6 million were eliminated.
| 2010 | Change | 2009 | Change | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Fresh products | $ | 348,052 | 15.9 | % | $ | 300,235 | (4.9 | %) | $ | 315,667 | ||||||||||
| CalavoFoods | 50,299 | 13.0 | % | 44,530 | (2.8 | %) | 45,807 | |||||||||||||
| Total net sales | $ | 398,351 | 15.5 | % | $ | 344,765 | (4.6 | %) | $ | 361,474 | ||||||||||
| As a percentage of net sales: | ||||||||||||||||||||
| Fresh products | 87.4 | % | 87.1 | % | 87.3 | % | ||||||||||||||
| CalavoFoods | 12.6 | % | 12.9 | % | 12.7 | % | ||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
Fiscal 2011 vs. Fiscal 2010:
Net sales fordelivered by the year ended October 31, 2010, when compared to 2009,business increased by approximately $53.6$72.6 million, or 15.5%20.9%, principally as a result of anfrom fiscal 2010 to 2011. This increase in both our Fresh products and CalavoFoods segments. The increase in fresh product sales for the year ended October 31, 2010during fiscal 2011 was primarily related to increasedan increase in sales of California avocados and tomatoes. These increases wereMexican sourced avocados. This increase was partially offset, however, by decreased sales from tomatoes and California sourced avocados. See details below.
Sales of Mexican sourced avocados pineapples and Chilean sourced avocados. Whileincreased $98.1 million, or 81.9%, for the procurement of fresh avocados relatedyear ended October 31, 2011, when compared to our fresh products segment is seasonal based on region, our CalavoFoods business is generally not subject to a seasonal effect.the same prior year period. The increase in net sales delivered by our CalavoFoods businessMexican sourced avocados was due primarily to a combination of an increase in pounds sold and an increase in the net sales price per carton. Mexican sourced avocados sales reflect an increase in 33.8 million pounds of avocados sold, or 29.1%, when compared to the same prior year period. We attribute most of this increase in volume to the significant decrease in the California avocado crop (see below). In addition, the sales price per carton increased by approximately 40.9%. We attribute this increase primarily to a lower overall volume of avocados in the marketplace, as well as a steady to higher demand for avocados when compared to the same prior year period.
Mexican grown avocados are primarily sold in the U.S., Japanese, and/or European marketplace. We anticipate that sales of Mexican grown avocados will decrease in fiscal 2011, due to a higher volume of avocados in the marketplace which will decrease overall sales prices.
Partially offsetting the overall increase was a decrease in sales of tomatoes of $17.7 million, or 42.5%, for the year ended October 31, 2011, when compared to the same prior year period. The decrease in sales for tomatoes was primarily due to a decrease in volume by 36.1% when compared to the same prior year period. This significant decrease was mainly due to a freeze in Mexico that resulted in less units in the marketplace. In addition, tomatoes had a decrease in the average selling price per carton of approximately 10.1%, when compared to the same prior year period.
Sales of California sourced avocados decreased $10.3 million, or 6.4%, for the year ended October 31, 2011, when compared to the same prior year period. The decrease in California sourced avocados was due to a decrease of 75.8 million pounds of avocados
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sold or 47.2%, when compared to the same prior year period. We attribute most of this decrease in volume to the smaller California avocado crop in the current year.
California avocados are primarily sold in the U.S. marketplace. We anticipate that sales volume of California grown avocados will increase in fiscal 2011, due to a larger expected avocado crop.
Fiscal 2010 vs. Fiscal 2009:
Net sales delivered by the business increased by approximately $47.8 million, or 15.9%, from fiscal 2009 to 2010. This increase was primarily related to an increase in sales of California sourced avocados (due primarily to a significant increase in cartons sold) as well as tomatoes (due primarily to an increase in units sold and an increase in per unit sales price). These increases were partially offset, however, by decreased sales from Mexican sourced avocados (due primarily to a decrease in cartons sold and a decrease in sales price per unit), pineapples (due primarily to a decrease in units sold), as well as Chilean sourced avocados (due primarily to a decrease in cartons sold and a decrease in sales price per unit).
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Sales of tomatoes increased $27.5 million, or 195.7%, for fiscal year 2010, when compared to the same prior year period. The increase in sales for tomatoes is due to an increase in the average per carton selling price of 128.1%, in addition to a 29.6% increase in the number of units sold. We attribute most of the increase in the per carton selling price to the lower volume of tomatoes in the U.S. marketplace (due to weather conditions in Florida) for fiscal 2010, as compared to the same prior period. We attribute most of the increase in units sold to growers supplying us with significantly more volume, due primarily to market conditions. We do not anticipate a significant change in the sales of tomatoes for fiscal 2011, based on current weather conditions in Florida.
Partially offsetting such increases described above was a decrease in sales of Mexican sourced avocados, which decreased $49.0 million, or 29.0%, for fiscal year 2010, when compared to the same prior year period. The decrease in Mexican sourced avocados was primarily related to the decrease in the volume of Mexican fruit sold by 29.1 million pounds, or 20.1%, when compared to the same prior year period. In addition, Mexican sourced avocados had a decrease in the average selling price per carton of approximately 11.2%, when compared to the same prior year period. As mentioned above, we attribute most of this decrease in volume and price to the increase in volume of California sourced avocados in the U.S. marketplace during fiscal year 2010, as compared to the same prior year period.
Sales of pineapples decreased $9.5 million, or 71.2%, when compared to the same prior year period. The decrease in sales for pineapples was primarily due to a decrease in volume by 73.2% when compared to the same prior year period. This decrease is primarily related to the expiration of our agreement with Maui Pineapple Company (Maui) in December 2009, which was primarily related to Maui exiting the pineapple business. We do not anticipate a significant change in pineapple sales during fiscal 2011.
Sales of Chilean sourced avocados decreased $9.5 million, or 57.2% for fiscal year 2010, when compared to the same prior year period. The volume of Chilean fruit sold decreased by approximately 7.8 million pounds, or 51.1%, when compared to the same prior year period. This decrease was primarily related to the smaller Chilean avocado crop in fiscal year 2010 when compared to the crop in fiscal year 2009. In addition to the increase in pounds sold, our average selling prices, on a per carton basis, experienced a decrease of 12.4% for fiscal 2010, when compared to the same prior period. We attribute most of this decrease in volume and price to the increase in volume of California sourced avocados in the U.S. marketplace during fiscal year 2010, as compared to the same prior year period.
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Calavo Foods
Fiscal 20092011 vs. Fiscal 2008:
Calavo Foods sales delivered by the business decreased by approximately $15.4 million, or 4.9%, from fiscal 2008 to 2009. This decrease was primarily related to decreased sales of California avocados, tomatoes, and pineapples. Such decreases were partially offset, however, by increased sales from Mexican and Chilean sourced avocados. For fiscal 2009, due to the significant increase in the Mexican avocado crop, there was an increase in the volume of avocados delivered to the United States market. As a result, avocado prices industry-wide decreased for most of fiscal 2009, which primarily caused our total avocado revenues to decrease for the year.
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Fiscal 2010 vs. Fiscal 2009:
Net sales increased by approximately $5.8 million, or 13.0% for fiscal 2010, when compared to the same prior period. This increase is primarily related to a 1.8% increase in total pounds sold for fiscal year 2010 and an increase in the average net selling price per pound of 2.4%, when compared to the same prior year period. The increase in average net selling price is primarily related to a change in sales mix. In addition, the recently acquired Calavo Salsa LisaCSL contributed approximately $0.8 million for fiscal year 2010.
We currently have two 215L ultra high pressure machines located in Uruapan. Starting in fiscal year 2010, we have begun using the two 215L ultra high pressure machines to pressurize all product lines within CalavoFoodsCalavo Foods (including frozen products). This has caused our operating capacity for these two 215L ultra high pressure machines to be approximately 80% as of October 31, 2010. Our estimated combined operating capacity for these two machines was approximately 59% as of October 31, 2009. A 3rd ultra high pressure machine with a larger capacity of 350L has been ordered and is expected to begin operating during our second fiscal quarter of 2011. We believe with this 3rd machine our operating capacity will be in line with our current sales projections and expected growth. Net sales of our ultra high pressure (fresh) products, typically sold to retail customers, represented approximately 46% and 47% of total processed segment sales for the years ended October 31, 2010 and 2009.
We believe that these ultra high pressure machines will enable our company to deliver the widest available array of prepared avocado and other products to our customers. Consequently, we believe that we are positioned to expand our ultra high pressure product line to include more avocado related products, mangoes and other readily available fruit products. We anticipate a marginal increase in sales related to our CalavoFoods.
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| 2010 | Change | 2009 | Change | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Gross Margins: | ||||||||||||||||||||
| Fresh products | $ | 38,443 | 32.2 | % | $ | 29,076 | 30.8 | % | $ | 22,223 | ||||||||||
| CalavoFoods | 13,087 | (15.3 | %) | 15,457 | 41.1 | % | 10,958 | |||||||||||||
| Total gross margins | $ | 51,530 | 15.7 | % | $ | 44,533 | 34.2 | % | $ | 33,181 | ||||||||||
| Gross profit percentages: | ||||||||||||||||||||
| Fresh products | 11.0 | % | 9.7 | % | 7.0 | % | ||||||||||||||
| CalavoFoods | 26.0 | % | 34.7 | % | 23.9 | % | ||||||||||||||
| Consolidated | 12.9 | % | 12.9 | % | 9.2 | % | ||||||||||||||
Our cost of sales consists predominantly of fruit costs, packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products, and other direct expenses pertaining to products sold. Gross margins decreased by approximately $8.7 million, or 16.8%, for the year ended October 31, 2011, when compared to the same period for fiscal 2010. This decrease was attributable to both our Fresh products and our Calavo Foods segments.
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The following table summarizes our gross margins and gross profit percentages by business segment:
| 2011 | Change | 2010 | Change | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Gross Margins: | ||||||||||||||||||||
Fresh products | $ | 31,838 | (17.2 | %) | $ | 38,443 | 32.2 | % | $ | 29,076 | ||||||||||
Calavo Foods(1) | 11,023 | (15.8 | %) | 13,087 | (15.3 | %) | 15,457 | |||||||||||||
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Total gross margins | $ | 42,861 | (16.8 | %) | $ | 51,530 | 15.7 | % | $ | 44,533 | ||||||||||
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Gross profit percentages: | ||||||||||||||||||||
Fresh products | 7.6 | % | 11.0 | % | 9.7 | % | ||||||||||||||
Calavo Foods | 10.8 | % | 26.0 | % | 34.7 | % | ||||||||||||||
Consolidated | 8.2 | % | 12.9 | % | 12.9 | % | ||||||||||||||
| (1) | Includes gross margin of $4.3 million in fiscal 2011 related to recently acquired RFG. See Note 17 in the Notes to the Consolidated Condensed Financial Statements for additional information related to the acquisition of RFG. |
Fresh products
Fiscal 2011 vs. Fiscal 2010:
During fiscal year 2011, as compared to the same prior year period, the decrease in our Fresh products segment gross margin percentage was primarily related to higher costs associated with California sourced avocados. This was caused by fewer pounds being sold by approximately 47.2%, increasing our per pound costs, which, as a result, negatively impacted gross margins. This decrease was primarily related to the smaller California avocado crop. Contributing to the decrease in the gross margin percentage was higher Mexican sourced avocado fruit costs year-over-year by approximately 55.2%. We were able to increase the selling prices of Mexican sourced avocados, but not at the same rate at which fruit costs increased. We attribute this increase primarily to a lower overall volume of avocados in the marketplace, in conjunction with a steady-to-higher demand for avocados, when compared to the same prior year period. The combined effect of these negatively impacted gross margins. In addition, despite the recent strengthening of the U.S. Dollar to Mexican Peso exchange rate, on a year to date basis, the U.S. Dollar to Mexican Peso exchange rate weakened during fiscal 2011, when compared to the same prior period. All of these combined had the effect of increasing our per pound costs, which, as a result, negatively impacted gross margins.
Any significant fluctuations in the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross margins for our Fresh and Calavo Foods segments.
The gross margin and/or gross profit percentage for consignment sales, including certain Chilean avocados and tomatoes, are dependent on the volume of fruit we handle, the average selling prices, and the competitiveness of the returns that we provide to third-party growers/packers. The gross margin we earn is generally based on a commission agreed to with each party, which usually is a percent of the overall selling price. Although we generally do not take legal title to such avocados and perishable products, we do assume responsibilities (principally assuming credit risk, inventory loss and delivery risk, and limited pricing risk) that are consistent with acting as a principal in the transaction. Accordingly, our results of operations include sales stayed consistent at 12.9%and cost of sales from the sale of avocados and perishable products procured under consignment arrangements. For fiscal years 2011, we generated gross margins of $3.5 million from the sale of fresh produce products that were packed by third parties. This is a $2.5 million decrease in gross margin for consigned sales compared to previous year. This decrease is due to a decrease in tomato sales of 42.5% for fiscal year 20102011, when compared to fiscalthe same prior year 2009. Gross margins increasedperiod. The decrease in sales for tomatoes was primarily due to a decrease in volume by approximately $7.0 million, or 15.7%, for fiscal year 2010,36.1% when compared to the same prior year period. This increasesignificant decrease was attributable primarilymainly due to an increasea freeze in our Fresh products segment, partially offset byMexico that resulted in less units. In addition, tomatoes had a decrease in our CalavoFoods segment.
Fiscal 2010 vs. Fiscal 2009:
During fiscal year 2010, as compared to the same prior year period, the increase in our Fresh products segment gross margin and gross margin percentage was primarily related to an increase in the gross margin percentage for California avocados. This was due to a significant increase in the volume of California avocados sold, which increased 222.0%. This increase was primarily related to the larger California avocado crop. This had the effect of decreasing our per pound costs, which, as a result, positively impacted gross margins. Partially offsetting this increase in gross margin was a decrease in margins for Mexican sourced avocados due to a similar fruit cost year-over-year, but at a lower selling price, for Mexican sourced avocados. We believe this decrease in selling price is primarily related to a significantly higher volume of non-Mexican fruit in the U.S marketplace, which put downward pressure on carton selling prices. As a result of this downward pressure, we were not able to purchase Mexican sourced fruit as effectively (in
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relation to the selling price) as we were able to in the same prior year period. Additionally, we experienced a decrease in the volume of Mexican sourced avocados sold by 29.1 million pounds or 20.1%, which we believe was primarily related to the aforementioned pricing pressure. In addition, the U.S. Dollar to Mexican Peso exchange rate weakened during fiscal 2010, when compared to the same prior period. All of these combined had the effect of increasing our per pound costs, which, as a result, negatively impacted gross margins.
As mentioned above, the weakening of the U.S. Dollar compared to the Mexican Peso negatively affected our gross margin for fiscal year 2010. Any significant fluctuations in the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross margins for our fresh and CalavoFoodsCalavo Foods segments.
The gross margin and gross profit percentage for consignment sales, including certain Chilean avocados and tomatoes, are dependent on the volume of fruit we handle, the average selling prices, and the competitiveness of the returns that we provide to
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Calavo Foods
Fiscal 20092011 vs. Fiscal 2008:
Gross profit percentages for Calavo Foods for the year 2009,ended October 31, 2011, as compared to the same prior year period, the increase in our Fresh products segment gross margin percentage wasdecreased primarily related to a significant decrease in fruit costs for Mexican sourced avocados, as well as a decrease in substantially all operating costs related to our Mexican operations. These decreases are primarily related to the large Mexican avocado crop, as well as the considerable strengthening of the U.S. Dollar compared to the Mexican Peso. For fiscal year 2009, when compared to the prior year period, we experienced an increase in the volume of Mexican sourced avocados sold by 35.1 million pounds or 31.1%. Combined, these had the effect of decreasing our per pound costs, which, as a result positively impacted gross margins. Such increase was partially offset, however, by a decrease inof significantly higher fruit costs. Fruit costs increased 55.2% for the average carton selling price of Mexican avocados, which decreased approximately 13.4%year ended October 31, 2011, when compared to the same prior year period. Collectively, these items positively increasedWe attribute this increase primarily to a lower overall volume of avocados in the marketplace, in conjunction with a steady-to-higher demand for avocados, when compared to the same prior year period. As discussed above, material fluctuations in fruit costs can have a significant impact on gross margins generated fromin the saleCalavo Foods segment. The increase in our production costs was primarily related to the aforementioned change (see net sales discussion) in the food safety standards that added steps in our manufacturing process during the first quarter of Mexican avocados from approximately $11.1 millionfiscal 2011. In addition, in fiscal year 2008the fourth quarter of 2011, our 350L ultra high pressure machine experienced a mechanical failure. This restricted the amount of product that could be produced, which lowered our overall volume and increasing our production costs. We have replaced this machine in the first quarter of 2012, and believe our operating capacity to $22.5 million in fiscal year 2009.
Partially offsetting the competitivenessdecrease in margins was the addition of the returns that we providerecently acquired RFG, which contributed approximately $4.3 million in margins for the year ended October 31, 2011, when compared to third-party growers/packers. The gross margin we earn is generally based on a commission agreedthe same prior year period.
In addition, the U.S. Dollar to with each party, which varies from a fixedMexican Peso exchange rate per box to a percent of the overall selling price. Although we generally do not take legal title to such avocados and perishable products, we do assume responsibilities (principally assuming credit risk, inventory loss and delivery risk, and limited pricing risk) that are consistent with acting as a principal in the transaction. Accordingly, our results of operations include sales and cost of sales from the sale of avocados and perishable products procured under consignment arrangements. Forweakened during fiscal years 2009, we generated gross margins of $2.8 million from the sale of fresh produce products that were packed by third parties.
Fiscal 2010 vs. Fiscal 2009:
Gross margin percentages for our CalavoFoodsCalavo Foods business are largely dependent on the pricing of our final product and the cost of avocados used in preparing guacamole. The CalavoFoodsCalavo Foods gross profit percentages for the fiscal year 2010, when compared to the same prior year period, decreased $2.4 million or 15.3%, primarily as a result of higher fruit and operating costs, partially offset by an increase in total pounds sold by 1.8%. We anticipate that the gross profit percentage for our CalavoFoodsCalavo Foods segment will continue to experience significant fluctuations during the next fiscal year primarily due to the uncertainty of the cost of fruit that will be used in the production process.
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| 2010 | Change | 2009 | Change | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Selling, general and administrative | $ | 23,168 | 1.7 | % | $ | 22,791 | 9.0 | % | $ | 20,914 | ||||||||||
| Percentage of net sales | 5.8 | % | 6.6 | % | 5.8 | % | ||||||||||||||
| 2011 | Change | 2010 | Change | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Selling, general and administrative(1) | $ | 24,527 | 5.9 | % | $ | 23,168 | 1.7 | % | $ | 22,791 | ||||||||||
Percentage of net sales | 4.7 | % | 5.8 | % | 6.6 | % | ||||||||||||||
| (1) | Includes selling, general and administrative expenses of $3.1 million in fiscal 2011 related to recently acquired RFG. See Note 17 in the Notes to the Consolidated Condensed Financial Statements for additional information related to the acquisition of RFG. |
Selling, general and administrative expenses include costs of marketing and advertising, sales expenses and other general and administrative costs. Selling, general and administrative expenses increased $1.4 million, or 5.9%, for the year ended October 31, 2011, when compared to the same prior year period. This increase was related to the acquisition of RFG which contributed $3.1 million in selling, general and administrative expenses for the year ended October 31, 2011. The remaining is a decrease of $1.7 million, which is due to lower corporate costs, including, but not limited to, management bonuses (totaling approximately $3.2 million), and a decrease in the contingent consideration liability related to the acquisition of CSL (totaling approximately $0.6 million, see Note 16 of the consolidated financial statements), partially offset by increases in salaries and employee benefits (totaling approximately $1.2 million), broker commission (totaling approximately $0.3 million), audit fees (totaling approximately $0.2 million), consulting fees (totaling approximately $0.2 million), legal fees (totaling approximately $0.1 million) and employee benefits (totaling approximately $0.1 million).
For fiscal year 2010, selling, general and administrative expenses increased $0.4 million or 1.7% when compared to the same period for fiscal 2009. This increase was primarily related to higher corporate costs, including, but not limited to, costs related to an increase in management bonuses (totaling approximately $0.9 million), and an increase in directors fees (totaling approximately $0.3 million). Such higher corporate costs were partially offset, however, by lower salaries and employee benefits (totaling approximately $0.4 million), lower audit fees (totaling approximately $0.3$ 0.3 million) and a decrease in bad debt expense (totaling approximately $0.1 million).
Interest income
| 2010 | Change | 2009 | Change | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Interest income | $ | 274 | (28.1 | %) | $ | 381 | (26.2 | %) | $ | 516 | ||||||||||
| Percentage of net sales | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||||||||
| 2011 | Change | 2010 | Change | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Interest income | $ | 191 | (30.3 | %) | $ | 274 | (28.1 | %) | $ | 381 | ||||||||||
Percentage of net sales | 0.0 | % | 0.1 | % | 0.1 | % | ||||||||||||||
Interest income was primarily generated from loans to growers. The decrease in interest income in fiscal 20102011 as compared to 20092010 is due to the principal balances being paid off by Agricola Belher for infrastructure advances.
Interest expense
| 2010 | Change | 2009 | Change | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Interest expense | $ | (834 | ) | (24.7 | %) | $ | (1,108 | ) | (25.4 | %) | $ | (1,485 | ) | |||||||
| Percentage of net sales | (0.2 | %) | (0.3 | %) | (0.4 | %) | ||||||||||||||
| 2011 | Change | 2010 | Change | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Interest expense | $ | 1,016 | 21.8 | % | $ | 834 | (24.7 | %) | $ | 1,108 | ||||||||||
Percentage of net sales | (0.2 | %) | (0.2 | %) | (0.3 | %) | ||||||||||||||
Interest expense is primarily generated from our line of credit borrowings, as well as our term loan agreements with FCW and BoA. In 2011, we entered into a loan agreement with Farm Credit West, PCA. FCW in connection with the acquisition of RFG. For fiscal 2011, as compared to fiscal 2010, the increase in interest expense was primarily related to a higher average outstanding balance under our term loan agreements and our non-collateralized, revolving credit facilities with FCA and BoA.
For fiscal 2010, as compared to fiscal 2009, the decrease in interest expense was primarily related to a lower average outstanding balance and an overall decrease in interest rates under our non-collateralized, revolving credit facilities with Farm Credit West, PCA and Bank of America, N.A.
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| 2010 | Change | 2009 | Change | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Other income, net | $ | 430 | 63.5 | $ | 263 | (63.2 | %) | $ | 715 | |||||||||||
| Percentage of net sales | 0.1 | % | 0.1 | % | 0.2 | % | ||||||||||||||
| 2011 | Change | 2010 | Change | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Other income, net | $ | 137 | (68.1 | )% | $ | 430 | 63.5 | % | $ | 263 | ||||||||||
Percentage of net sales | 0.0 | % | 0.1 | % | 0.1 | % | ||||||||||||||
Other income, net includes dividend income, as well as certain other transactions that are outside of the normal course of operations. During fiscal 2011, 2010, 2009, and 2008,2009, we received $0.2 million, $0.1$0.2 million, and $0.6$0.1 million as dividend income from Limoneira.
Provision for Income Taxes
| 2010 | Change | 2009 | Change | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Provision for income taxes | $ | 11,341 | 35.4 | % | $ | 8,277 | 81.2 | % | $ | 4,567 | ||||||||||
| Percentage of income before provision for income taxes | 39.1 | % | 37.8 | % | 37.2 | % | ||||||||||||||
| 2011 | Change | 2010 | Change | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Provision for income taxes | $ | 7,249 | (36.1 | )% | $ | 11,341 | 35.4 | % | $ | 8,277 | ||||||||||
Percentage of income before provision for income taxes | 39.8 | % | 39.1 | % | 37.8 | % | ||||||||||||||
The effective income tax rate for fiscal years 2011, 2010, 2009, and 20082009 is higher than the federal statutory rate principally due to state taxes. Our effective income tax rate increased from 37.8% in fiscal year 2009 to 39.1% in fiscal year 2010 primarily due to a higher portion of the total pre-tax book income being taxed at the higher U.S. statutory rate compared to Mexico as well as an increase in our federal tax rate, partially offset by several miscellaneous reductions. Our effective income tax rate increased from 37.2% in fiscal year 2008 to 37.8% in fiscal year 2009 primarily as a result of an increase in foreign taxes, partially offset by a decrease in our average state tax rate.
Quarterly Results of Operations
The following table presents our operating results for each of the eight fiscal quarters in the period ended October 31, 2010.2011. The information for each of these quarters is derived from our unaudited interim financial statements and should be read in conjunction with our audited consolidated financial statements included in this Annual Report. In our opinion, all necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present our unaudited quarterly results. Historically, we receive and sell a substantially lesser number of California avocados in our first fiscal quarter. Certain items in the prior period amounts have been reclassified to conform to the current period presentation.
| Three months ended | ||||||||||||||||||||||||||||||||
| Oct. 31, | July 31, | Apr. 30, | Jan. 31, | Oct. 31, | July 31, | Apr. 30, | Jan. 31, | |||||||||||||||||||||||||
| 2010 | 2010 | 2010 | 2010 | 2009 | 2009 | 2009 | 2009 | |||||||||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||||||||||||||
| Net sales | $ | 107,234 | $ | 114,578 | $ | 109,219 | $ | 67,320 | $ | 80,942 | $ | 106,347 | $ | 86,829 | $ | 70,647 | ||||||||||||||||
| Cost of sales | 92,940 | 99,303 | 96,133 | 58,445 | 71,713 | 96,441 | 73,890 | 58,188 | ||||||||||||||||||||||||
| Gross margin | 14,294 | 15,275 | 13,086 | 8,875 | 9,229 | 9,906 | 12,939 | 12,459 | ||||||||||||||||||||||||
| Selling, general and administrative | 7,035 | 5,514 | 5,455 | 5,164 | 6,134 | 5,822 | 5,535 | 5,300 | ||||||||||||||||||||||||
| Operating income | 7,259 | 9,761 | 7,631 | 3,711 | 3,095 | 4,084 | 7,404 | 7,159 | ||||||||||||||||||||||||
| Other income (expense), net | 169 | 181 | 233 | 36 | 164 | (22 | ) | 75 | (71 | ) | ||||||||||||||||||||||
| Income before provision for income taxes | 7,428 | 9,942 | 7,864 | 3,747 | 3,259 | 4,062 | 7,479 | 7,088 | ||||||||||||||||||||||||
| Provision for income taxes | 2,733 | 4,045 | 3,090 | 1,473 | 955 | 1,597 | 3,017 | 2,708 | ||||||||||||||||||||||||
| Net income | 4,695 | 5,897 | 4,774 | 2,274 | 2,304 | 2,465 | 4,462 | 4,380 | ||||||||||||||||||||||||
| Add: Net loss-noncontrolling interest | 55 | 50 | 19 | — | — | — | — | — | ||||||||||||||||||||||||
| Net income-Calavo Growers, Inc | $ | 4,750 | $ | 5,947 | $ | 4,793 | $ | 2,274 | $ | 2,304 | $ | 2,465 | $ | 4,462 | $ | 4,380 | ||||||||||||||||
| Basic | $ | 0.32 | $ | 0.41 | $ | 0.33 | $ | 0.16 | $ | 0.16 | $ | 0.17 | $ | 0.31 | $ | 0.30 | ||||||||||||||||
| Diluted | $ | 0.32 | $ | 0.41 | $ | 0.33 | $ | 0.16 | $ | 0.16 | $ | 0.17 | $ | 0.31 | $ | 0.30 | ||||||||||||||||
| Number of shares used in per share computation: | ||||||||||||||||||||||||||||||||
| Basic | 14,710 | 14,651 | 14,572 | 14,505 | 14,505 | 14,457 | 14,423 | 14,419 | ||||||||||||||||||||||||
| Diluted | 14,722 | 14,676 | 14,598 | 14,572 | 14,582 | 14,529 | 14,508 | 14,429 | ||||||||||||||||||||||||
| Three months ended | ||||||||||||||||||||||||||||||||
| Oct. 31, 2011 | July 31, 2011 | Apr. 30, 2011 | Jan. 31, 2011 | Oct. 31, 2010 | July 31, 2010 | Apr. 30, 2010 | Jan. 31, 2010 | |||||||||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||||||||||||||
Net sales | $ | 147,349 | $ | 165,141 | $ | 118,720 | $ | 91,319 | $ | 107,234 | $ | 114,578 | $ | 109,219 | $ | 67,320 | ||||||||||||||||
Cost of sales | 133,917 | 153,801 | 109,300 | 82,650 | 92,940 | 99,303 | 96,133 | 58,445 | ||||||||||||||||||||||||
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Gross margin | 13,432 | 11,340 | 9,420 | 8,669 | 14,294 | 15,275 | 13,086 | 8,875 | ||||||||||||||||||||||||
Selling, general and administrative | 7.033 | 6,844 | 5,635 | 5,015 | 7,035 | 5,514 | 5,455 | 5,164 | ||||||||||||||||||||||||
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Operating income | 6,399 | 4,496 | 3,785 | 3,654 | 7,259 | 9,761 | 7,631 | 3,711 | ||||||||||||||||||||||||
Other income (expense), net | (271 | ) | (105 | ) | 223 | 22 | 169 | 181 | 233 | 36 | ||||||||||||||||||||||
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Income before provision for income taxes | 6,128 | 4,391 | 4,008 | 3,676 | 7,428 | 9,942 | 7,864 | 3,747 | ||||||||||||||||||||||||
Provision for income taxes | 2,540 | 1,689 | 1,634 | 1,386 | 2,733 | 4,045 | 3,090 | 1,473 | ||||||||||||||||||||||||
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Net income | 3,588 | 2,702 | 2,374 | 2,290 | 4,695 | 5,897 | 4,774 | 2,274 | ||||||||||||||||||||||||
Add: Net loss-noncontrolling interest | 52 | 11 | 30 | 21 | 55 | 50 | 19 | — | ||||||||||||||||||||||||
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Net income-Calavo Growers, Inc | $ | 3,640 | $ | 2,713 | $ | 2,404 | $ | 2,311 | $ | 4,750 | $ | 5,947 | $ | 4,793 | $ | 2,274 | ||||||||||||||||
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Basic | $ | 0.25 | $ | 0.18 | $ | 0.16 | $ | 0.16 | $ | 0.32 | $ | 0.41 | $ | 0.33 | $ | 0.16 | ||||||||||||||||
Diluted | $ | 0.25 | $ | 0.18 | $ | 0.16 | $ | 0.16 | $ | 0.32 | $ | 0.41 | $ | 0.33 | $ | 0.16 | ||||||||||||||||
Number of shares used in per share computation: | ||||||||||||||||||||||||||||||||
Basic | 14,769 | 14,755 | 14,726 | 14,723 | 14,710 | 14,651 | 14,572 | 14,505 | ||||||||||||||||||||||||
Diluted | 14,781 | 14,767 | 14,734 | 14,736 | 14,722 | 14,676 | 14,598 | 14,572 | ||||||||||||||||||||||||
Liquidity and Capital Resources
Operating activities for fiscal 2011, 2010 2009 and 20082009 provided cash flows of $18.2$7.9 million, $22.0$20.0 million, and $5.3$22.0 million. Fiscal year 20102011 operating cash flows reflect our net income of $17.6$11.0 million, net noncash charges (depreciation and amortization, income from unconsolidated entities, provision for losses on accounts receivable, interest on deferred compensation, deferred income taxes, and stock compensation expense) of $4.1$5.6 million and a net decrease from changes in the non-cash components of our working capital accounts of approximately $3.5$8.7 million.
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The decrease in advances to suppliers of $1.0 million and a decrease in income tax receivable of $0.8 million.
Cash used in investing activities was $7.7$20.9 million, $6.0$9.5 million, and $7.5$6.0 million for fiscal years 2011, 2010, 2009, and 2008.2009. Fiscal year 20102011 cash flows used in investing activities includes the acquisition of RFG net of cash acquired of $13.4 million, capital expenditures of $4.7 million, the final annual Earn-Out payment from the acquisition of HS and HP, totaling approximately $4.5$4.8 million, and $0.4 million in payments relatedinfrastructure advances to the acquisitionAgricola Belher of Calavo Salsa Lisa.$3.0 million. Such payments were partially offset by the collection of $1.8 million from Agricola Belher, pursuant to our tomato agreements and distributions received of $0.1$0.3 million from our joint venture Maui Fresh International, LLC.
Cash provided by financing activities was $14.8 million for fiscal year 2011. Cash used in financing activities was $10.3 million and $16.6 million for fiscal years 2010 and 2009. Cash provided by financing activities was $2.7 million for fiscal years 2008. Cash used during fiscal year 20102011 primarily includes the paymentproceeds from issuance of a dividend totaling $7.3 million, and payments related to our long-term obligations of $6.8 million. Partially offsetting these payments, however, were $2.2$22.1 million, in cash provided by the exercise of stock options, and proceeds from our non-collateralized, revolving credit facilities totaling $1.6$9.7 million, and $0.9 million provided by the exercise of stock options. Partially offsetting these proceeds, however, were payments on long-term debt obligations of $9.8 million and a payment of a dividend of $8.1 million.
Our principal sources of liquidity are our existing cash reserves, cash generated from operations and amounts available for borrowing under our existing credit facilities. Cash and cash equivalents as of October 31, 2011 and 2010 and 2009 totaled $1.1$2.8 million and $0.9$1.1 million. Our working capital at October 31, 20102011 was $14.8$8.6 million, compared to $12.1$14.8 million at October 31, 2009.
We believe that cash flows from operations and available credit facilities will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements. We will continue to evaluate grower recruitment opportunities and exclusivity arrangements with food service companies to fuel growth in each of our business segments.
Effective JulyMay 31, 2009, we2011, the Company and FCW, entered into a newTerm Revolving Credit Agreement (Revolving Agreement). Under the terms of the Revolving Agreement, we are advanced funds for working capital purposes, the purchase and installation of capital items, as well as other corporate needs of the Company. Total credit available under the borrowing agreement is $40 million, up from $30 million, and expires on February 1, 2016. This increase was at our request and not due to any immediate cash flows needs. The credit facility and term loan agreement withcontain various financial covenants, the most significant relating to tangible net worth (as defined), Fixed Charge Coverage Ratio (as defined) and Current Ratio (as defined).
Effective September 30, 2011, the Company and Bank of America, N.A. (BoA), entered into an agreement, Amendment No. 4 to Loan Agreement (the Agreement), which increasedamended our existing non-collateralized, revolving credit facility with BoA. Under the terms of the Agreement, we are advanced funds primarily for working capital purposes. Total credit available under the borrowing agreement is now $25 million, up from $15 million and now expires on February 1, 2016. This increase was at our request and not due to $15.0 million, from $10.0 million. This new agreement expires July 1, 2011. Our non-collateralized, revolving credit facilities with Farm Credit West, PCA expires in February 2012. any immediate cash flows needs.
Under the terms of these agreements, we are advanced funds for both working capital and long-term productive asset purchases. Total credit available under these combined borrowing agreements was $45$65 million, with a weighted-average interest rate of 2.3%1.6% and 2.4%2.3% at October 31, 20102011 and 2009.2010. Under these credit facilities, we had $8.2$17.9 million and $12.0$8.2 million outstanding as October 31, 20102011 and 2009, of which $6.5 million was classified as a long-term liability as October 31, 2009.2010. These credit facilities contain various financial covenants, the most significant relating to tangible net worthTangible Net Worth (as defined), Current Ratio (as defined), and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)Fixed Charge Coverage Ratio (as defined). We were in compliance with all such covenants at October 31, 2010.
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The following table summarizes contractual obligations pursuant to which we are required to make cash payments. The information is presented as of our fiscal year ended October 31, 2010:
| Payments due by period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Long-term debt obligations (including interest) | $ | 8,768 | $ | 1,781 | $ | 3,340 | $ | 3,045 | $ | 602 | ||||||||||
| Revolving credit facilities | 8,150 | 8,150 | — | — | — | |||||||||||||||
| Defined benefit plan | 275 | 42 | 84 | 84 | 65 | |||||||||||||||
| Operating lease commitments | 11,492 | 1,480 | 2,743 | 2,513 | 4,756 | |||||||||||||||
| Total | $ | 28,685 | $ | 11,453 | $ | 6,167 | $ | 5,642 | $ | 5,423 | ||||||||||
| Payments due by period | ||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long-term debt obligations (including interest) | $ | 25,626 | $ | 6,164 | $ | 11,571 | $ | 7,379 | $ | 512 | ||||||||||
Revolving credit facilities | 17,860 | 17,860 | — | — | — | |||||||||||||||
Defined benefit plan | 245 | 42 | 84 | 84 | 35 | |||||||||||||||
Operating lease commitments | 19,686 | 2,662 | 5,210 | 4,381 | 7,433 | |||||||||||||||
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Total | $ | 63,417 | $ | 26,728 | $ | 16,865 | $ | 11,844 | $ | 7,980 | ||||||||||
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The California avocado industry is subject to a state marketing order whereby handlers are required to collect assessments from the growers and remit such assessments to the California Avocado Commission (CAC). The assessments are primarily for advertising and promotions. The amount of the assessment is based on the dollars paid to the growers for their fruit, and, as a result, is not determinable until the value of the payments to the growers has been calculated.
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Recently Adopted Accounting Pronouncements
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In June 2009, the FASB issued revised guidance for the accounting of variable interest entities, which replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. This accounting guidance also requires an ongoing reassessment of whether an entity is the primary beneficiary and requires additional disclosures about an enterprise’s involvement in variable interest entities. The adoption of this accounting guidance did not have a material impact on our financial position, results of operations or liquidity.
Recently Issued Accounting Standards
In June 2011, the FASB issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this standard will only impact the presentation of our consolidated financial statements and will have no impact on the reported results.
In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We do not believe that adoption of this guidance will have a material impact on our financial position and results of operations.
In December 2010, the FASB issued an update to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The
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qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This accounting guidance will be effective for financial statements issued for fiscal years beginning after NovemberDecember 15, 2009,2010, and interim periods within those fiscal years. Early adoption is not permitted. We do not believe that adoption of this guidance will have a material impact on our financial position and results of operations.
Item 7A. 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 facilities with financial institutions, 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 October 31, 2010.
| Expected maturity date October 31, | ||||||||||||||||||||||||||||||||
| (All amounts in thousands) | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair Value | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents (1) | $ | 1,064 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,064 | $ | 1,064 | ||||||||||||||||
| Accounts receivable (1) | 31,743 | — | — | — | — | — | 31,743 | 31,743 | ||||||||||||||||||||||||
| Advances to suppliers (1) | 1,598 | — | — | — | — | — | 1,598 | 1,598 | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Payable to growers (1) | $ | 11,208 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 11,208 | $ | 11,208 | ||||||||||||||||
| Accounts payable (1) | 2,839 | — | — | — | — | — | 2,839 | 2,839 | ||||||||||||||||||||||||
| Current borrowings pursuant to credit facilities (1) | 7,150 | — | — | — | — | — | 7,150 | 7,150 | ||||||||||||||||||||||||
| Current long-term borrowings pursuant to credit facilities (2) | 1,000 | — | — | — | — | — | 1,000 | 1,024 | ||||||||||||||||||||||||
| Fixed-rate long-term obligations (3) | 1,369 | 1,373 | 1,376 | 1,380 | 1,383 | 577 | 7,458 | 8,082 | ||||||||||||||||||||||||
| (All amounts in thousands) | Expected maturity date October 31, | |||||||||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents (1) | $ | 2,774 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,774 | $ | 2,774 | ||||||||||||||||
Accounts receivable (1) | 36,101 | — | — | — | — | — | 36,101 | 36,101 | ||||||||||||||||||||||||
Advances to suppliers (1) | 3,349 | — | — | — | — | — | 3,349 | 3,349 | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Payable to growers (1) | $ | 5,082 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 5,082 | $ | 5,082 | ||||||||||||||||
Accounts payable (1) | 7,038 | — | — | — | — | — | 7,038 | 7,038 | ||||||||||||||||||||||||
Current borrowings pursuant to credit facilities (1) | 17,860 | — | — | — | — | — | 17,860 | 17,860 | ||||||||||||||||||||||||
Fixed-rate long-term obligations (2) | 5,448 | 5,384 | 5,264 | 4,952 | 2,153 | 491 | 23,692 | 23,430 | ||||||||||||||||||||||||
| (1) | We believe the carrying amounts of cash and cash equivalents, accounts receivable, advances to suppliers, payable to growers, accounts payable, and current borrowings pursuant to credit facilities approximate their fair value due to the short maturity of these financial instruments. | |
| (2) | ||
| Fixed-rate long-term obligations bear interest rates ranging from |
Except as disclosed in Note 16, 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 business in Mexican pesos. Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy domestic cash needs. Historically, the consistency of the spot rate for the Mexican peso has led to a small-to-moderate impact on our operating results. We do not anticipate using derivative instruments to hedge fluctuations in the Mexican peso to U.S. dollar exchange rates during fiscal 2011. Total foreign currency losses for fiscal 2011, net of gains, was less than $0.1 million. Total foreign currency losses for fiscal 2010, net of gains was $0.1 million. Total foreign currency gains for fiscal 2009, and 2008, net of losses, was less than $0.1 million and $0.5 million.
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Item 8. Financial Statements and Supplementary Data
CALAVO GROWERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
| October 31, | ||||||||
| 2010 | 2009 | |||||||
Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,064 | $ | 875 | ||||
| Accounts receivable, net of allowances of $1,372 (2010) and $2,353 (2009) | 31,743 | 22,314 | ||||||
| Inventories, net | 14,831 | 11,731 | ||||||
| Prepaid expenses and other current assets | 8,424 | 6,430 | ||||||
| Advances to suppliers | 1,598 | 2,623 | ||||||
| Income taxes receivable | 1,816 | 2,178 | ||||||
| Deferred income taxes | 2,336 | 2,728 | ||||||
| Total current assets | 61,812 | 48,879 | ||||||
| Property, plant, and equipment, net | 41,059 | 38,621 | ||||||
| Investment in Limoneira Company | 34,986 | 24,200 | ||||||
| Investment in unconsolidated entities | 2,016 | 1,382 | ||||||
| Goodwill | 4,085 | 3,591 | ||||||
| Other assets | 6,240 | 6,076 | ||||||
| $ | 150,198 | $ | 122,749 | |||||
Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Payable to growers | $ | 11,208 | $ | 4,343 | ||||
| Trade accounts payable | 2,839 | 2,223 | ||||||
| Accrued expenses | 15,353 | 16,123 | ||||||
| Short-term borrowings | 8,150 | 5,520 | ||||||
| Dividend payable | 8,092 | 7,252 | ||||||
| Current portion of long-term obligations | 1,369 | 1,366 | ||||||
| Total current liabilities | 47,011 | 36,827 | ||||||
| Long-term liabilities: | ||||||||
| Long-term obligations, less current portion | 6,089 | 13,908 | ||||||
| Deferred income taxes | 8,266 | 2,527 | ||||||
| Total long-term liabilities | 14,355 | 16,435 | ||||||
| Commitments and contingencies | ||||||||
| Noncontrolling interest | 575 | — | ||||||
| Shareholders’ equity: | ||||||||
| Common stock ($0.001 par value, 100,000 shares authorized; 14,712 and 14,505 shares outstanding at October 31, 2010 and 2009) | 14 | 14 | ||||||
| Additional paid-in capital | 42,319 | 39,714 | ||||||
| Accumulated other comprehensive income | 6,959 | 466 | ||||||
| Retained earnings | 38,965 | 29,293 | ||||||
| Total shareholders’ equity | 88,257 | 69,487 | ||||||
| $ | 150,198 | $ | 122,749 | |||||
| October 31, | ||||||||
| 2011 | 2010 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,774 | $ | 1,064 | ||||
Accounts receivable, net of allowances of $2,285 (2011) and $1,372 (2010) | 36,101 | 31,743 | ||||||
Inventories, net | 17,787 | 14,831 | ||||||
Prepaid expenses and other current assets | 6,220 | 8,424 | ||||||
Advances to suppliers | 3,349 | 1,598 | ||||||
Income taxes receivable | 3,111 | 1,816 | ||||||
Deferred income taxes | 2,136 | 2,336 | ||||||
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Total current assets | 71,478 | 61,812 | ||||||
Property, plant, and equipment, net | 47,091 | 41,059 | ||||||
Investment in Limoneira Company | 29,991 | 34,986 | ||||||
Investment in unconsolidated entities | 2,292 | 2,016 | ||||||
Goodwill | 18,349 | 4,085 | ||||||
Other assets | 16,122 | 6,240 | ||||||
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| $ | 185,323 | $ | 150,198 | |||||
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Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Payable to growers | $ | 5,082 | $ | 11,208 | ||||
Trade accounts payable | 7,038 | 2,839 | ||||||
Accrued expenses | 19,285 | 15,353 | ||||||
Short-term borrowings | 17,860 | 8,150 | ||||||
Dividend payable | 8,123 | 8,092 | ||||||
Current portion of long-term obligations | 5,448 | 1,369 | ||||||
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Total current liabilities | 62,836 | 47,011 | ||||||
Long-term liabilities: | ||||||||
Long-term obligations, less current portion | 18,244 | 6,089 | ||||||
Deferred income taxes | 8,002 | 8,266 | ||||||
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Total long-term liabilities | 26,246 | 14,355 | ||||||
Commitments and contingencies | ||||||||
Noncontrolling interest | 461 | 575 | ||||||
Shareholders’ equity: | ||||||||
Common stock ($0.001 par value, 100,000 shares authorized; 14,770 and 14,712 shares outstanding at October 31, 2011 and 2010) | 14 | 14 | ||||||
Additional paid-in capital | 49,929 | 42,319 | ||||||
Accumulated other comprehensive income | 3,935 | 6,959 | ||||||
Retained earnings | 41,902 | 38,965 | ||||||
|
|
|
| |||||
Total shareholders’ equity | 95,780 | 88,257 | ||||||
|
|
|
| |||||
| $ | 185,323 | $ | 150,198 | |||||
|
|
|
| |||||
See accompanying notes to consolidated financial statements.
30
33
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| Year Ended October 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Net sales | $ | 398,351 | $ | 344,765 | $ | 361,474 | ||||||
| Cost of sales | 346,821 | 300,232 | 328,293 | |||||||||
| Gross margin | 51,530 | 44,533 | 33,181 | |||||||||
| Selling, general and administrative | 23,168 | 22,791 | 20,914 | |||||||||
| Operating income | 28,362 | 21,742 | 12,267 | |||||||||
| Equity in earnings from unconsolidated entities | 749 | 610 | 279 | |||||||||
| Interest income | 274 | 381 | 516 | |||||||||
| Interest expense | (834 | ) | (1,108 | ) | (1,485 | ) | ||||||
| Other income, net | 430 | 263 | 715 | |||||||||
| Income before provision for income taxes | 28,981 | 21,888 | 12,292 | |||||||||
| Provision for income taxes | 11,341 | 8,277 | 4,567 | |||||||||
| Net Income | 17,640 | 13,611 | 7,725 | |||||||||
| Add: Net loss attributable to noncontrolling interest | 124 | — | — | |||||||||
| Net income attributable to Calavo Growers, Inc. | $ | 17,764 | $ | 13,611 | $ | 7,725 | ||||||
| Calavo Growers, Inc.’s net income per share: | ||||||||||||
| Basic | $ | 1.22 | $ | 0.94 | $ | 0.54 | ||||||
| Diluted | $ | 1.22 | $ | 0.94 | $ | 0.53 | ||||||
| Number of shares used in per share computation: | ||||||||||||
| Basic | 14,610 | 14,451 | 14,398 | |||||||||
| Diluted | 14,619 | 14,503 | 14,481 | |||||||||
| Year Ended October 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Net sales | $ | 522,529 | $ | 398,351 | $ | 344,765 | ||||||
Cost of sales | 479,668 | 346,821 | 300,232 | |||||||||
|
|
|
|
|
| |||||||
Gross margin | 42,861 | 51,530 | 44,533 | |||||||||
Selling, general and administrative | 24,527 | 23,168 | 22,791 | |||||||||
|
|
|
|
|
| |||||||
Operating income | 18,334 | 28,362 | 21,742 | |||||||||
Equity in earnings from unconsolidated entities | 557 | 749 | 610 | |||||||||
Interest income | 191 | 274 | 381 | |||||||||
Interest expense | (1,016 | ) | (834 | ) | (1,108 | ) | ||||||
Other income, net | 137 | 430 | 263 | |||||||||
|
|
|
|
|
| |||||||
Income before provision for income taxes | 18,203 | 28,981 | 21,888 | |||||||||
Provision for income taxes | 7,249 | 11,341 | 8,277 | |||||||||
|
|
|
|
|
| |||||||
Net income | 10,954 | 17,640 | 13,611 | |||||||||
Add: Net loss attributable to noncontrolling interest | 114 | 124 | — | |||||||||
|
|
|
|
|
| |||||||
Net income attributable to Calavo Growers, Inc. | $ | 11,068 | $ | 17,764 | $ | 13,611 | ||||||
|
|
|
|
|
| |||||||
Calavo Growers, Inc.’s net income per share: | ||||||||||||
Basic | $ | 0.75 | $ | 1.22 | $ | 0.94 | ||||||
|
|
|
|
|
| |||||||
Diluted | $ | 0.75 | $ | 1.22 | $ | 0.94 | ||||||
|
|
|
|
|
| |||||||
Number of shares used in per share computation: | ||||||||||||
Basic | 14,743 | 14,610 | 14,451 | |||||||||
|
|
|
|
|
| |||||||
Diluted | 14,751 | 14,619 | 14,503 | |||||||||
|
|
|
|
|
| |||||||
See accompanying notes to consolidated financial statements.
31
34
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Year ended | ||||||||||||
| October 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Net income | $ | 17,640 | $ | 13,611 | $ | 7,725 | ||||||
| Other comprehensive income (loss), before tax: | ||||||||||||
| Unrealized holding gains (losses) arising during period | 10,786 | (5,704 | ) | (19,058 | ) | |||||||
| Income tax benefit (expense) related to items of other comprehensive income (loss) | (4,293 | ) | 2,227 | 7,337 | ||||||||
| Other comprehensive income (loss), net of tax | 6,493 | (3,477 | ) | (11,721 | ) | |||||||
| Comprehensive income (loss) | 24,133 | 10,134 | (3,996 | ) | ||||||||
| Add: Net loss attributable to noncontrolling interest | 124 | — | — | |||||||||
| Comprehensive income (loss) — Calavo Growers, Inc. | $ | 24,257 | $ | 10,134 | $ | (3,996 | ) | |||||
| Year ended October 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Net income | $ | 10,954 | $ | 17,640 | $ | 13,611 | ||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss), before tax: | ||||||||||||
Unrealized holding gains (losses) arising during period | (4,996 | ) | 10,786 | (5,704 | ) | |||||||
Income tax benefit (expense) related to items of other comprehensive income (loss) | 1,972 | (4,293 | ) | 2,227 | ||||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss), net of tax | (3,024 | ) | 6,493 | (3,477 | ) | |||||||
|
|
|
|
|
| |||||||
Comprehensive income | 7,930 | 24,133 | 10,134 | |||||||||
Add: Net loss attributable to noncontrolling interest | 114 | 124 | — | |||||||||
|
|
|
|
|
| |||||||
Comprehensive income – Calavo Growers, Inc. | $ | 8,044 | $ | 24,257 | $ | 10,134 | ||||||
|
|
|
|
|
| |||||||
See accompanying notes to consolidated financial statements.
32
35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Income | Earnings | Total | |||||||||||||||||||
Balance, October 31, 2007 | 14,371 | 14 | 38,068 | 15,664 | 20,257 | 74,003 | ||||||||||||||||||
| Exercise of stock options and income tax benefit of $147 | 48 | — | 534 | — | — | 534 | ||||||||||||||||||
| Stock compensation expense | — | — | 24 | — | — | 24 | ||||||||||||||||||
| Unrealized loss on Limoneira investment, net | — | — | — | (11,721 | ) | — | (11,721 | ) | ||||||||||||||||
| Dividend declared to shareholders | — | — | — | — | (5,048 | ) | (5,048 | ) | ||||||||||||||||
| Net income | — | — | — | — | 7,725 | 7,725 | ||||||||||||||||||
Balance, October 31, 2008 | 14,419 | 14 | 38,626 | 3,943 | 22,934 | 65,517 | ||||||||||||||||||
| Exercise of stock options and income tax benefit of $261 | 86 | — | 1,044 | — | — | 1,044 | ||||||||||||||||||
| Stock compensation expense | — | — | 44 | — | — | 44 | ||||||||||||||||||
| Unrealized loss on Limoneira investment, net | — | — | — | (3,477 | ) | — | (3,477 | ) | ||||||||||||||||
| Dividend declared to shareholders | — | — | — | — | (7,252 | ) | (7,252 | ) | ||||||||||||||||
| Net income | — | — | — | — | 13,611 | 13,611 | ||||||||||||||||||
Balance, October 31, 2009 | 14,505 | 14 | 39,714 | 466 | 29,293 | 69,487 | ||||||||||||||||||
| Exercise of stock options and income tax benefit of $664 | 207 | — | 2,553 | — | — | 2,553 | ||||||||||||||||||
| Stock compensation expense | — | — | 52 | — | — | 52 | ||||||||||||||||||
| Unrealized gain on Limoneira investment, net | — | — | — | 6,493 | — | 6,493 | ||||||||||||||||||
| Dividend declared to shareholders | — | — | — | — | (8,092 | ) | (8,092 | ) | ||||||||||||||||
| Net income attributable to Calavo Growers, Inc. | — | — | — | — | 17,764 | 17,764 | ||||||||||||||||||
Balance, October 31, 2010 | 14,712 | $ | 14 | $ | 42,319 | $ | 6,959 | $ | 38,965 | $ | 88,257 | |||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Retained Earnings | Total | ||||||||||||||||||||
| Shares | Amount | Capital | Income | |||||||||||||||||||||
Balance, October 31, 2008 | 14,419 | 14 | 38,626 | 3,943 | 22,934 | 65,517 | ||||||||||||||||||
Exercise of stock options and income tax benefit of $261 | 86 | — | 1,044 | — | — | 1,044 | ||||||||||||||||||
Stock compensation expense | — | — | 44 | — | — | 44 | ||||||||||||||||||
Unrealized loss on Limoneira investment, net | — | — | — | (3,477 | ) | — | (3,477 | ) | ||||||||||||||||
Dividend declared to shareholders | — | — | — | — | (7,252 | ) | (7,252 | ) | ||||||||||||||||
Net income | — | — | — | — | 13,611 | 13,611 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, October 31, 2009 | 14,505 | 14 | 39,714 | 466 | 29,293 | 69,487 | ||||||||||||||||||
Exercise of stock options and income tax benefit of $664 | 207 | — | 2,553 | — | — | 2,553 | ||||||||||||||||||
Stock compensation expense | — | — | 52 | — | — | 52 | ||||||||||||||||||
Unrealized gain on Limoneira investment, net | — | — | — | 6,493 | — | 6,493 | ||||||||||||||||||
Dividend declared to shareholders | — | — | — | — | (8,092 | ) | (8,092 | ) | ||||||||||||||||
Net income attributable to Calavo Growers, Inc. | — | — | — | — | 17,764 | 17,764 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, October 31, 2010 | 14,712 | 14 | 42,319 | 6,959 | 38,965 | 88,257 | ||||||||||||||||||
Exercise of stock options and income tax benefit of $26 | 15 | — | 239 | — | — | 239 | ||||||||||||||||||
Stock compensation expense | — | — | 188 | — | — | 188 | ||||||||||||||||||
Unrealized loss on Limoneira investment, net | — | — | — | (3,024 | ) | — | (3,024 | ) | ||||||||||||||||
Acquisition of RFG | 43 | — | 7,183 | — | — | 7,183 | ||||||||||||||||||
Dividend declared to shareholders | — | — | — | — | (8,131 | ) | (8,131 | ) | ||||||||||||||||
Net income attributable to Calavo Growers, Inc. | — | — | — | — | 11,068 | 11,068 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, October 31, 2011 | 14,770 | $ | 14 | $ | 49,929 | $ | 3,935 | $ | 41,902 | $ | 95,780 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
See accompanying notes to consolidated financial statements.
33
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended October 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Cash Flows from Operating Activities: | ||||||||||||
| Net income | $ | 17,640 | $ | 13,611 | $ | 7,725 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 3,368 | 3,054 | 2,657 | |||||||||
| Provision for losses on accounts receivable | 38 | 106 | 20 | |||||||||
| Income from unconsolidated entities | (750 | ) | (610 | ) | (279 | ) | ||||||
| Interest on deferred consideration | 62 | 152 | 75 | |||||||||
| Stock compensation expense | 52 | 44 | 24 | |||||||||
| Loss on disposal of property, plant, and equipment | — | — | 70 | |||||||||
| Deferred income taxes | 1,332 | (215 | ) | 940 | ||||||||
| Effect on cash of changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (9,353 | ) | 5,297 | (1,400 | ) | |||||||
| Inventories, net | (3,006 | ) | 3,158 | (5,587 | ) | |||||||
| Prepaid expenses and other current assets | (2,544 | ) | (963 | ) | 1 | |||||||
| Advances to suppliers | 1,025 | 219 | (549 | ) | ||||||||
| Income taxes receivable | 765 | (1,072 | ) | 461 | ||||||||
| Other assets | (25 | ) | (113 | ) | 171 | |||||||
| Payable to growers | 6,865 | (602 | ) | 919 | ||||||||
| Trade accounts payable and accrued expenses | 2,729 | (69 | ) | 48 | ||||||||
| Net cash provided by operating activities | 18,198 | 21,997 | 5,296 | |||||||||
Cash Flows from Investing Activities: | ||||||||||||
| Acquisitions of property, plant, and equipment | (4,767 | ) | (4,149 | ) | (2,674 | ) | ||||||
| Loan to Agricola Belher | — | — | (750 | ) | ||||||||
| Collections from Agricola Belher | 1,781 | 507 | 1,000 | |||||||||
| Distribution from unconsolidated entity | 116 | — | — | |||||||||
| Acquisition of Hawaiian Sweet and Pride, net of cash acquired | (4,500 | ) | (2,348 | ) | (5,030 | ) | ||||||
| Acquisition of Calavo Salsa Lisa, net of cash acquired | (351 | ) | — | — | ||||||||
| Net cash used in investing activities | (7,721 | ) | (5,990 | ) | (7,454 | ) | ||||||
Cash Flows from Financing Activities: | ||||||||||||
| Dividend paid to shareholders | (7,252 | ) | (5,047 | ) | (5,031 | ) | ||||||
| Proceeds (repayments) from (on) line of credit borrowings, net | 1,580 | (11,160 | ) | 8,500 | ||||||||
| Payments on long-term obligations | (6,766 | ) | (1,364 | ) | (1,389 | ) | ||||||
| Proceeds from stock option exercises | 1,889 | 783 | 387 | |||||||||
| Tax benefit of stock option exercises | 261 | 147 | 233 | |||||||||
| Net cash provided by (used in) financing activities | (10,288 | ) | (16,641 | ) | 2,700 | |||||||
| Net increase (decrease) in cash and cash equivalents | 189 | (634 | ) | 542 | ||||||||
| Cash and cash equivalents, beginning of year | 875 | 1,509 | 967 | |||||||||
| Cash and cash equivalents, end of year | $ | 1,064 | $ | 875 | $ | 1,509 | ||||||
Supplemental Information - | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 850 | $ | 1,195 | $ | 1,455 | ||||||
| Income taxes | $ | 8,845 | $ | 8,803 | $ | 2,504 | ||||||
Noncash Investing and Financing Activities: | ||||||||||||
| Tax receivable increase related to stock option exercise | $ | 664 | $ | 261 | $ | 147 | ||||||
| Declared dividends payable | $ | 8,092 | $ | 7,252 | $ | 5,047 | ||||||
| Construction in progress included in trade accounts payable and accrued expenses | $ | 32 | $ | 245 | $ | 259 | ||||||
| Capital lease obligations | $ | — | $ | — | $ | 1,125 | ||||||
| Fixed asset acquired with long term debt | $ | — | $ | — | $ | 4,000 | ||||||
| Minimum earnout adjustment related to the acquisition of Hawaiian Sweet and Pride | $ | — | $ | 902 | $ | — | ||||||
| Unrealized holding gains (losses) | $ | 10,786 | $ | (5,704 | ) | $ | (19,058 | ) | ||||
| In February 2010, we entered into an asset purchase and contribution agreement in which we acquired a 65 percent ownership interest in newly created Calavo Salsa Lisa, LLC which acquired substantially all of the assets of Lisa’s Salsa Company. See Note 16 for further information. The following table summarizes the estimated fair values of the non-cash assets acquired and liabilities assumed at the date of acquisition (in thousands): | ||||||||||||
| (in thousands) | 2010 | |||||||||||
| Current assets, excluding cash | $ | 214 | ||||||||||
| Property, plant, and equipment | 321 | |||||||||||
| Goodwill | 88 | |||||||||||
| Intangible assets | 1,950 | |||||||||||
| Total assets acquired | 2,573 | |||||||||||
| Current liabilities | (55 | ) | ||||||||||
| Noncontrolling interest | (699 | ) | ||||||||||
| Contingent consideration | (1,468 | ) | ||||||||||
| Net non-cash assets acquired | $ | 351 | ||||||||||
34
| Year Ended October 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income | $ | 10,954 | $ | 17,640 | $ | 13,611 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 4,327 | 3,368 | 3,054 | |||||||||
Provision for losses on accounts receivable | 64 | 38 | 106 | |||||||||
Income from unconsolidated entities | (557 | ) | (749 | ) | (610 | ) | ||||||
Interest on contingent consideration | 101 | 62 | 152 | |||||||||
Revalue adjustment on contingent consideration | (535 | ) | — | — | ||||||||
Stock compensation expense | 188 | 52 | 44 | |||||||||
Loss on disposal of property, plant, and equipment | 139 | — | — | |||||||||
Deferred income taxes | 1,907 | 1,332 | (215 | ) | ||||||||
Effect on cash of changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 4,270 | (9,353 | ) | 5,297 | ||||||||
Inventories, net | (2,137 | ) | (3,006 | ) | 3,158 | |||||||
Prepaid expenses and other current assets | 1,936 | (2,544 | ) | (963 | ) | |||||||
Advances to suppliers | (1,751 | ) | 1,025 | 219 | ||||||||
Income taxes receivable | (1,933 | ) | 765 | (1,072 | ) | |||||||
Other assets | (12 | ) | (25 | ) | (113 | ) | ||||||
Payable to growers | (4,901 | ) | 8,645 | (95 | ) | |||||||
Trade accounts payable and accrued expenses | (4,194 | ) | 2,729 | (69 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 7,866 | 19,979 | 22,504 | |||||||||
Cash Flows from Investing Activities: | ||||||||||||
Acquisitions of property, plant, and equipment | (4,826 | ) | (4,767 | ) | (4,149 | ) | ||||||
Loan to Agricola Belher | (3,000 | ) | — | — | ||||||||
Distribution from unconsolidated entity | 281 | 116 | — | |||||||||
Acquisition of Renaissance Food Group, net of cash acquired | (13,362 | ) | — | — | ||||||||
Acquisition of Hawaiian Sweet and Pride, net of cash acquired | — | (4,500 | ) | (2,348 | ) | |||||||
Acquisition of Calavo Salsa Lisa, net of cash acquired | — | (351 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (20,907 | ) | (9,502 | ) | (6,497 | ) | ||||||
Cash Flows from Financing Activities: | ||||||||||||
Payment of dividend to shareholders | (8,100 | ) | (7,252 | ) | (5,047 | ) | ||||||
Proceeds (payments) from (on) revolving credit facility, net | 9,710 | 1,580 | (11,160 | ) | ||||||||
Proceeds from issuance of long-term obligations | 22,135 | — | — | |||||||||
Payments on long-term obligations | (9,871 | ) | (6,766 | ) | (1,364 | ) | ||||||
Proceeds from stock option exercises | 213 | 1,889 | 783 | |||||||||
Tax benefit of stock option exercises | 664 | 261 | 147 | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) financing activities | 14,751 | (10,288 | ) | (16,641 | ) | |||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | 1,710 | 189 | (634 | ) | ||||||||
Cash and cash equivalents, beginning of year | 1,064 | 875 | 1,509 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | $ | 2,774 | $ | 1,064 | $ | 875 | ||||||
|
|
|
|
|
| |||||||
Supplemental Information: | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 985 | $ | 850 | $ | 1,195 | ||||||
|
|
|
|
|
| |||||||
Income taxes | $ | 6,313 | $ | 8,845 | $ | 8,803 | ||||||
|
|
|
|
|
| |||||||
Noncash Investing and Financing Activities: | ||||||||||||
Tax receivable increase related to stock option exercise | $ | 26 | $ | 664 | $ | 261 | ||||||
|
|
|
|
|
| |||||||
Declared dividends payable | $ | 8,123 | $ | 8,092 | $ | 7,252 | ||||||
|
|
|
|
|
| |||||||
Construction in progress included in trade accounts payable and accrued expenses | $ | 36 | $ | 32 | $ | 245 | ||||||
|
|
|
|
|
| |||||||
Collection for Agricola Belher Infrastructure Advance | $ | 1,225 | $ | 1,781 | $ | 507 | ||||||
|
|
|
|
|
| |||||||
Minimum earnout adjustment related to the acquisition of Hawaiian Sweet and Pride | $ | — | $ | — | $ | 902 | ||||||
|
|
|
|
|
| |||||||
Unrealized holding gains (losses) | $ | (4,996 | ) | $ | 10,786 | $ | (5,704 | ) | ||||
|
|
|
|
|
| |||||||
At June 1, 2011
Current assets, excluding cash | $ | 9,623 | ||
Property, plant, and equipment | 4,580 | |||
Goodwill | 14,264 | |||
Other assets | 117 | |||
Intangible assets | 8,690 | |||
|
| |||
Total assets acquired | 37,274 | |||
Current liabilities | (12,292 | ) | ||
Contingent consideration | (7,774 | ) | ||
Long-term obligations | (2,894 | ) | ||
Additional paid-in capital | (952 | ) | ||
|
| |||
Net non-cash assets acquired | $ | 13,362 | ||
|
|
37
CALAVO GROWERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-CONTINUED
(in thousands)
In February 2010, we entered into an asset purchase and contribution agreement in which we acquired a 65 percent ownership interest in Calavo Salsa Lisa, LLC which acquired substantially all ownership interests of Hawaiian Pride, LLCthe assets of Lisa’s Salsa Company. See Note 16 for approximately $5.0 million, as well as approximately $7.7 million in deferred and contingent consideration, plus acquisition costs of approximately $0.2 million.further information. The following table summarizes the estimated fair values of the non-cash assets acquired and liabilities assumed at the date of acquisition.
| (in thousands) | 2008 | |||
| Current assets | $ | 1,303 | ||
| Fixed assets | 10,947 | |||
| Intangible assets | 1,310 | |||
| Total non-cash assets acquired | 13,560 | |||
| Current liabilities assumed | 809 | |||
| Deferred and contingent consideration | 7,721 | |||
| Net non-cash assets acquired | $ | 5,030 | ||
At February 8, 2010
Current assets, excluding cash | $ | 214 | ||
Property, plant, and equipment | 321 | |||
Goodwill | 88 | |||
Intangible assets | 1,950 | |||
|
| |||
Total assets acquired | 2,573 | |||
Current liabilities | (55 | ) | ||
Noncontrolling interest | (699 | ) | ||
Contingent consideration | (1,468 | ) | ||
|
| |||
Net non-cash assets acquired | $ | 351 | ||
|
|
See accompanying notes to consolidated financial statements.
35
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the business
Business
Calavo Growers, Inc. (Calavo, the Company, we, us or our) procures, is a global leader in the avocado industry and markets avocados and other perishable commodities and prepares and distributes processed avocado products.an expanding provider of value-added fresh food. Our expertise in marketing and distributing avocados, processedprepared avocados, and other perishable foods allows us to deliver a wide array of fresh and processedprepared food products to food distributors, produce wholesalers, supermarkets, and restaurants on a worldwide basis. We procure avocados principally from California, Mexico, and Chile. Through our various operating facilities, in Arizona, California, Hawaii, New Jersey, Texas, and Mexico, we sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas for distributionpapayas. Additionally, we also produce salsa and prepare ready-to-eat produce and deli products. We distribute our products both domestically and internationally. We also have an operating facility in Minnesota that produces salsa. Weinternationally and report our operations in two different business segments: (1) Fresh products and (2) CalavoFoods.Calavo Foods. See Note 11 in our consolidated financial statements for further information about our business segments. See Note 1617 for discussion regarding our acquisition of Calavo Salsa Lisa.
2. Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States.
Our consolidated financial statements include the accounts of Calavo Growers, Inc. and our wholly owned subsidiaries, Calavo de Mexico S.A. de C.V., Calavo Foods de Mexico S.A. de C.V., Calavo Inversiones (Chile) Limitada, Maui Fresh International, Inc. (Maui), Calavo Inversiones (Chile) Limitada, Hawaiian Sweet, Inc. (“HS”)(HS) and Hawaiian Pride, LLC (“HP”)(HP). In addition, we consolidate our newly acquired entity Calavo Salsa Lisa, LLC (CSL), in which we have a 65 percent ownership interest. See Note 16 for discussion regarding our acquisition of Calavo Salsa Lisa. Such dissolution did not have any impact onCSL. In addition, we consolidate our financial position ornewly acquired entity Renaissance Food Group, LLC (RFG). See Note 17 for discussion regarding our resultsacquisition of operations.RFG. All intercompany accounts and transactions have been eliminated in consolidation. Effective July 2009, we formed Calavo Inversiones (Chile) Limitada, a wholly owned subsidiary.
Cash and Cash Equivalents
We consider all highly liquid financial instruments purchased with an original maturity date of three months or less to be cash equivalents. The carrying amounts of cash and cash equivalents approximate their fair values.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist primarily of non-trade receivables, infrastructure advances and prepaid expenses. Non-trade receivables were $6.9$4.5 and $5.0$6.9 million at October 31, 20102011 and 2009.2010. Infrastructure advances are discussed further below. Prepaid expenses of $0.9 million and $0.3 million at October 31, 2011 and 2010, are primarily for insurance, rent and other items.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a monthly weighted-average basis, which approximates the first-in, first-out method; market is based upon estimated replacement costs. Costs included in inventory primarily include the following: fruit, picking and hauling, overhead, labor, materials and freight.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are stated at cost and amortized over the lesser of their estimated useful lives or the term of the lease, using the straight-line method. Useful lives are as follows: buildings and improvements —- 7 to 50 years; leasehold improvements —- the lesser of the term of the lease or 7 years; equipment —- 7 to 25 years; information systems hardware and software —– 3 to 15 years. Significant repairs and maintenance that increase the value or extend the useful life of our fixed asset are capitalized. Replaced fixed assets are written off. Ordinary maintenance and repairs are charged to expense.
We capitalize software development costs for internal use beginning in the application development stage and ending when the asset is placed into service. Costs capitalized include coding and testing activities and various implementation costs. These costs are limited to (1) external direct costs of materials and services consumed in developing or obtaining internal-use computer software; (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project to the extent of the time spent directly on the project; and (3) interest cost incurred while developing internal-use computer software. See Note 4 for further information.
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Goodwill is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. Goodwill impairment testing is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test would be unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. 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. The estimates and assumptions described above, along with other factors such as discount rates, will significantly affect the outcome of the impairment tests and the amounts of any resulting impairment losses. We performed our annual assessment of goodwill and determined that no impairment existed as of October 31, 2010.
Long-lived Assets
Long-lived assets, including fixed assets and intangible assets (other than goodwill), are continually monitored and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of undiscounted cash flows is based upon, among other things, certain assumptions about future operating performance, growth rates and other factors. Estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to the business model or changes in operating performance. If the sum of the undiscounted cash flows (excluding interest) is less thenthan the carrying value, an impairment loss will be recognized, measured as the amount by which the carrying value exceeds the fair value of the asset. We have evaluated our long-lived assets and determined that no impairment existed as of October 31, 2010.
Investments
We account for non-marketable investments using the equity method of accounting if the investment gives us the ability to exercise significant influence over, but not control, an investee. Significant influence generally exists when we have an ownership interest representing between 20% and 50% of the voting stock of the investee. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and our proportionate share of earnings or losses and distributions. Additional investments by other parties in the investee, if any, will result in a reduction in our ownership interest, and the resulting gain or loss will be recorded in our consolidated statements of income.
In August 2006, we entered into a joint venture agreement with San Rafael Distributing (SRD) for the purpose of the wholesale marketing, sale and distribution of fresh produce from the existing location of SRD at the Los Angeles Wholesale Produce Market (Terminal Market), located in Los Angeles, California. Such joint venture operates under the name of Maui Fresh International, LLC (Maui Fresh LLC)Fresh) and commenced operations in August 2006. SRD and Calavo each have an equal one-half ownership interest in Maui Fresh, but SRD has overall management responsibility for the operations of Maui Fresh at the Terminal Market. We use the equity method to account for this investment.
Commencing on the first anniversary of this agreement and continuing thereafter during the term of the agreement, Calavo has the unconditional right, but not the obligation, to purchase the one-half interest in Maui Fresh owned by SRD at a purchase price to be determined pursuant to the agreement. The term of the agreement is for five years, which may be extended, or terminated early, as defined. As of October 31, 2011 and 2010, we have no advances outstanding to Maui Fresh. As of October 31, 2009, we have advanced Maui Fresh approximately $0.4 million (included in prepaid expenses and other current assets) for working capital purposes. Per the agreement, these advances were made at our own discretion and are expected to be paid back in cash.
In June 2009, we (through a newly createdour wholly owned subsidiary: Calavo Inversiones (Chile) Limitada) entered into a joint venture agreement with Exportadora M5, S.A. (M5) for the purpose of selling and distributing Chilean sourced avocados. Such joint venture operates under the name of Calavo de Chile and commenced operations in July 2009. M5 and Calavo each have an equal
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Marketable Securities
Our marketable securities consist of our investment in Limoneira Company (Limoneira) stock. We currently own approximately 15% of Limoneira’s outstanding common stock. These securities are carried at fair value as determined from quoted market prices. The estimated fair value, cost, and gross unrealized gain related to such investment was $35.0$30.0 million, $23.5 million and $11.5$6.5 million as of October 31, 2010.2011. The estimated fair value, cost, and gross unrealized gain related to such investment was $24.2$35.0 million, $23.5 million and $0.7$11.5 million as of October 31, 2009.
Advances to Suppliers
We advance funds to third-party growers primarily in Chile and Mexico for various farming needs. Typically, we obtain collateral (i.e. fruit, fixed assets, etc.) that approximates the value at risk, prior to making such advances. We continuously evaluate the ability of these growers to repay advances in order to evaluate the possible need to record an allowance. No such allowance was required at October 31, 2010,2011, nor October 31, 2009.
Pursuant to our distribution agreement, which was amended in fiscal 2011, with Agricola Belher (Belher) of Mexico, a producer of fresh vegetables, primarily tomatoes, for export to the U.S. market. Pursuant to such distribution agreement,market, Belher agreed, at their sole cost and expense, to harvest, pack, export, ship, and deliver tomatoes exclusively to our company, primarily our Arizona facility. In exchange, we agreed to sell and distribute such tomatoes, advance $2 millionmake advances to Belher for operating purposes, provide additional advances as shipments are made during the season (subject to limitations, as defined), and return the proceeds from such tomato sales to Belher, net of our commission and aforementioned advances. ThePursuant to such amended agreement also allowswith Belher, we advanced Belher a total of $3.0 million, up from $2.0 million in the original agreement, during fiscal 2011. Additionally, the amended agreement calls for us to continue to advance additional amounts to Belher at our sole discretion.$3.0 million per annum for operating purposes through 2019. These advances will be collected through settlements by the end of each year. As of October 31, 20102011 and 2009,2010, we have advanced $1.0total advances of $3.0 million and $2.0$1.0 million to Belher pursuant to this agreement, which is recorded in advances to suppliers.
Infrastructure Advances
Pursuant to our infrastructure agreement, in June 2007 withwe make advances to be used solely for the acquisition, construction, and installation of improvements to and on certain land owned/controlled by Belher, in order to significantly increase production yieldsas well as packing line equipment. Advances incur interest at 4.7% and fruit quality.6.5% at October 31, 2011 and 2010. Pursuant to thisthe revised/amended agreement discussed above, we advanced $2.4Belher $3.0 million and $4.2 million asduring fiscal 2011, which was used to build 47 hectares (approximately 116 acres) of shade-cloth/green house construction. As of October 31, 2011 and 2010, and 2009 ($1.2we have advanced a total of $4.2 million and $1.8$2.4 million ($0.8 million and $1.2 million included in prepaid expenses and other current assets and $1.2$3.4 million and $2.4$1.2 million included in other long-term assets). Belher is to annually repay these advances in no less than 20% increments through July 2012. Agricola Belher paid $1.8 million and $0.5 million in fiscal years 2010 and 2009 related to infrastructure advances. For fiscal year 2010 and 2009, we have not made any infrastructure advances to Agricola Belher. In addition, the agreement allows for additional $1.0 million advances to take place during the last five months of each of our fiscal years 2009 and 2010, but they are subject to certain conditions and are to be made at our sole discretion. Belher is to annually repay these advances in full on or before each of July 2010 and July 2011. For fiscal 2010 and 2009, no additional advances were made to Belher.2016. Interest is to be paid monthly or annually, as defined. Belher may prepay, without penalty, all or any portion of the advances at any time.
Accrued Expenses
Included in accrued expenses at October 31, 2011 and 2010 are un-vouchereduninvoiced receipts and deferred consideration of approximately $1.9$4.1 million and $1.5$1.9 million. Included in accrued expenses at October 31, 2009 are un-vouchered receipts and deferred consideration of $2.0 million and $3.9 million.
Revenue Recognition
Sales of products and related costs of products sold are recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. These terms are typically met upon shipment of product to the customer. Service revenue, including freight, ripening, storage, bagging and palletization charges, is recorded when services are performed and sales of the related products are delivered.
Shipping and Handling
We include shipping and handling fees billed to customers in net revenues. Amounts incurred by us for freight are included in cost of goods sold.
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We provide for promotional allowances at the time of sale, based on our historical experience. Our estimates are generally based on evaluating the historical relationship between promotional allowances and gross sales. The derived percentage is then applied to the current period’s sales revenues in order to arrive at the appropriate debit to sales allowances for the period. The offsetting credit is made to accrued expenses. When certain amounts of specific customer accounts are subsequently identified as promotional, they are written off against this allowance. Actual amounts may differ from these estimates and such differences are recognized as an adjustment to net sales in the period they are identified.
Allowance for Accounts Receivable
We provide an allowance for estimated uncollectible accounts receivable balances based on historical experience and the aging of the related accounts receivable.
Consignment Arrangements
We frequently enter into consignment arrangements with avocado and tomato growers and packers located outside of the United States and growers of certain perishable products in the United States. Although we generally do not take legal title to these avocados and perishable products, we do assume responsibilities (principally assuming credit risk, inventory loss and delivery risk, and limited pricing risk) that are consistent with acting as a principal in the transaction. Accordingly, the accompanying financial statements include sales and cost of sales from the sale of avocados and perishable products procured under consignment arrangements. Amounts recorded for each of the fiscal years ended October 31, 2011, 2010 2009 and 20082009 in the financial statements pursuant to consignment arrangements are as follows (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Sales | $ | 54,736 | $ | 44,776 | $ | 49,189 | ||||||
| Cost of Sales | 48,713 | 41,941 | 45,739 | |||||||||
| Gross Margin | $ | 6,023 | $ | 2,835 | $ | 3,450 | ||||||
| 2011 | 2010 | 2009 | ||||||||||
Sales | $ | 38,327 | $ | 54,736 | $ | 44,776 | ||||||
Cost of Sales | 34,859 | 48,713 | 41,941 | |||||||||
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Gross Margin | $ | 3,468 | $ | 6,023 | $ | 2,835 | ||||||
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Advertising Expense
Advertising costs are expensed when incurred. Such costs in fiscal 2011, 2010, 2009, and 20082009 were approximately $0.1 million.
Other income, net
Included in other income, net is dividend income totaling $0.3 million, $0.2$0.3 million and $0.6$0.2 million for fiscal years 2011, 2010, 2009, and 2008.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those related to valuation allowances for accounts receivable, goodwill, grower advances, inventories, long-lived assets, valuation of and estimated useful lives of identifiable intangible assets, stock-based compensation, promotional allowances and income taxes. On an ongoing basis, management reviews its estimates based upon currently available information. Actual results could differ materially from those estimates.
Income Taxes
We account for deferred tax liabilities and assets for the future consequences of events that have been recognized in our consolidated financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of our assets and liabilities result in a deferred tax asset, we perform an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
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The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from management’s estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.
Basic and Diluted Net Income per Share
Basic earnings per share is calculated using the weighted-average number of common shares outstanding during the period without consideration of the dilutive effect of stock options. The basic weighted-average number of common shares outstanding was 14,743,000, 14,610,000, 14,451,000, and 14,398,00014,451,000 for fiscal years 2011, 2010, 2009, and 2008.2009. Diluted earnings per common share is calculated using the weighted-average number of common shares outstanding during the period after consideration of the dilutive effect of stock options, which were 8,000, 9,000, 52,000, and 83,00052,000 for fiscal years 2011, 2010 2009 and 2008.2009. There were no significant anti-dilutive options for fiscal years 2011, 2010 2009 and 2008.
Stock-Based Compensation
We account for awards of equity instruments issued to employees under the fair value method of accounting and recognize such amounts in their statements of operations. 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.
The value of each option award that contains a market condition is estimated using a lattice-based option valuation model, while all other option awards are valued using the Black-Scholes-Merton option valuation model. We primarily consider the following assumptions when using these models: (1) expected volatility, (2) expected dividends, (3) expected life and (4) risk-free interest rate. Such models also consider the intrinsic value in the estimation of fair value of the option award. Forfeitures are estimated when recognizing compensation expense, and the estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.
We measure the fair value of our stock option awards on the date of grant. The following assumptions were used in the estimated grant date fair value calculations for stock options:
| 2010 | 2009 | 2008 | ||||||||||
| Risk-free interest rate | 1.70 | % | 2.02 | % | 2.95 | % | ||||||
| Expected volatility | 47.37 | % | 67.95 | % | 28.24 | % | ||||||
| Dividend yield | 2.5 | % | 4.3 | % | 2.4 | % | ||||||
| Expected life (years) | 4.0 | 4.0 | 4.0 | |||||||||
2011 | 2010 | 2009 | ||||||||
Risk-free interest rate | 0.96% - 1.40% | 1.70 | % | 2.02 | % | |||||
Expected volatility | 32.63% - 60.00% | 47.37 | % | 67.95 | % | |||||
Dividend yield | 2.5% | 2.5 | % | 4.3 | % | |||||
Expected life (years) | 1.5 - 4.0 | 4.0 | 4.0 | |||||||
For the years ended October 31, 2011, 2010 2009 and 2008,2009, we recognized compensation expense of $188,000, $52,000, $44,000, and $24,000$44,000 related to stock-based compensation.
The expected stock price volatility rates were based on the historical volatility of our common stock. The risk free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for periods approximating the expected life of the option. The expected life represents the average period of time that options granted are expected to be outstanding, as calculated using the simplified method described in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107.
The Black-Scholes-Merton and lattice-based option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because options held by our directors and employees have characteristics significantly different from those of traded options, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of these options.
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Our foreign operations are subject to exchange rate fluctuations and foreign currency transaction costs. The functional currency of our foreign subsidiaries is the United States 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 are included in income. Gains and losses resulting from foreign currency transactions are also recognized currently in income. Total foreign currency losses for fiscal 2011, net of gains, was less than $0.1 million. Total foreign currency losses for fiscal 2010, net of gains was $0.1 million. Total foreign currency gains for fiscal 2009, and 2008, net of losses, was less than $0.1 million and $0.5 million.
Fair Value of Financial Instruments
We believe that the carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value based on either their short-term nature or on terms currently available to the Company in financial markets. We believe that our fixed-rate long-term obligations have a fair value of approximately $8.1$23.4 million as of October 31, 2010,2011, with a corresponding carrying value of approximately $7.5$23.7 million. In addition, our long-term borrowings pursuant to credit facilities have a fair value and a corresponding carrying value of approximately of $1.0 million.
Derivative Financial Instruments
Except as disclosed in Note 16, we were not a party to any derivative instruments during the fiscal year 2010.2011. 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.
Recently Adopted Accounting Pronouncements
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In June 2009, the FASB issued revised guidance for the accounting of variable interest entities, which replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. This accounting guidance also requires an ongoing reassessment of whether an entity is the primary beneficiary and requires additional disclosures about an enterprise’s involvement in variable interest entities. The adoption of this accounting guidance did not have a material impact on our financial position, results of operations or liquidity.
Recently Issued Accounting Standards
In June 2011, the FASB issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this standard will only impact the presentation of our consolidated financial statements and will have no impact on the reported results.
In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We do not believe that adoption of this guidance will have a material impact on our financial position and results of operations.
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In December 2010, the FASB issued an update to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This accounting guidance will be effective for financial statements issued for fiscal years beginning after NovemberDecember 15, 2009,2010, and interim periods within those fiscal years. Early adoption is not permitted. We do not believe that adoption of this guidance will have a material impact on our financial position and results of operations.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as all changes in a company’s net assets, except changes resulting from transactions with shareholders. For the fiscal year ended October 31, 2011, other comprehensive income includes the unrealized loss on our Limoneira investment totaling $3.0 million, net of income taxes. Limoneira’s stock price at October 31, 2011 equaled $17.35 per share. For the fiscal year ended October 31, 2010, other comprehensive income includes the unrealized gain on our Limoneira investment totaling $6.5 million, net of income taxes. Limoneira’s stock price at October 31, 2010 equaled $20.24 per share, after a 10 for 1 stock split in the second quarter of fiscal year 2010. For the fiscal year ended October 31, 2009, other comprehensive lossincome includes the unrealized loss on our Limoneira investment totaling $3.5 million, net of income taxes. Limoneira’s stock price at October 31, 2009 equaled $14.00 per share (adjusted for the above mentioned stock split). For the fiscal year ended October 31, 2008, other comprehensive loss includes the unrealized loss on our Limoneira investment totaling $11.7 million, net of income taxes. Limoneira’s stock price at October 31, 2008 equaled $17.30 per share (adjusted for the above mentioned stock split).
Reclassifications
Certain items in the prior period financial statements have been reclassified to conform to the current period presentation.
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Inventories consist of the following (in thousands):
| October 31, | ||||||||
| 2010 | 2009 | |||||||
| Fresh fruit | $ | 8,630 | $ | 4,495 | ||||
| Packing supplies and ingredients | 3,069 | 2,652 | ||||||
| Finished processed foods | 3,132 | 4,584 | ||||||
| $ | 14,831 | $ | 11,731 | |||||
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Fresh fruit | $ | 6,588 | $ | 8,630 | ||||
Packing supplies and ingredients | 5,610 | 3,069 | ||||||
Finished prepared foods | 5,589 | 3,132 | ||||||
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| $ | 17,787 | $ | 14,831 | |||||
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We assess the recoverability of inventories through an ongoing review of inventory levels in relation to sales and forecasts and product marketing plans. When the inventory on hand, at the time of the review, exceeds the foreseeable demand, the value of inventory that is not expected to be sold is written down. The amount of the write-down is the excess of historical cost over estimated realizable value (generally zero). Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory.
The assessment of the recoverability of inventories and the amounts of any write-downs are based on currently available information and assumptions about future demand and market conditions. Demand for processed avocado products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than our projections. In the event that actual demand is lower than originally projected, additional inventory write-downs may be required.
We may retaindid not record any lower of cost or market adjustments during fiscal years 2011 and make available for sale some or all of the inventories which have been written down. In the event that actual demand is higher than originally projected, we may be able to sell a portion of these inventories in the future. We generally scrap inventories which have been written down and are identified as obsolete.
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4. Property, Plant, and Equipment
Property, plant, and equipment consist of the following (in thousands):
| October 31, | ||||||||
| 2010 | 2009 | |||||||
| Land | $ | 7,023 | $ | 6,923 | ||||
| Buildings and improvements | 18,039 | 17,694 | ||||||
| Leasehold improvements | 1,104 | 828 | ||||||
| Equipment | 48,725 | 45,812 | ||||||
| Information systems — Hardware and software | 5,175 | 5,209 | ||||||
| Construction in progress | 2,265 | 648 | ||||||
| 82,331 | 77,114 | |||||||
| Less accumulated depreciation and amortization | (41,272 | ) | (38,493 | ) | ||||
| $ | 41,059 | $ | 38,621 | |||||
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Land | $ | 7,023 | $ | 7,023 | ||||
Buildings and improvements | 18,279 | 18,039 | ||||||
Leasehold improvements | 1,315 | 1,104 | ||||||
Equipment | 50,511 | 48,725 | ||||||
Information systems - hardware and software | 4,479 | 5,175 | ||||||
Construction in progress | 4,426 | 2,265 | ||||||
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| 86,033 | 82,331 | |||||||
Less accumulated depreciation and amortization | (38,942 | ) | (41,272 | ) | ||||
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| $ | 47,091 | $ | 41,059 | |||||
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Depreciation expense was $3.2 million, $2.8 million $2.6 million and $2.1$2.6 million for fiscal years 2011, 2010, 2009, and 2008,2009, of which $0.1$0.2 million was related to depreciation on capital leases for fiscal years 2011, 2010, 2009, and 2008.
We capitalize software development costs for internal use beginning in the application development stage and ending when the asset is placed into service. We amortize such costs using the straight-line basis over estimated useful lives. InBeginning in fiscal year 2010, we have begunbegan the conversionprocess of converting to a new accounting software system.system, which is recorded into construction in progress. The net book value oftotal capitalized computer software costs related to this new accounting software system was $2.0$2.3 million and $0.4$1.7 million as of October 31, 20102011 and 2009 and2010. We expect to be completed with the related depreciation expense was $0.1 million forconversion of this accounting software in the second quarter of fiscal years ended October 31, 2010 and 2009.
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Other assets consist of the following (in thousands):
| October 31, | October 31, | |||||||
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| Grower advances | $ | 1,827 | $ | 2,123 | ||||
| Intangibles, net | 2,872 | 1,205 | ||||||
| Loan to Agricola Belher | 1,225 | 2,450 | ||||||
| Other | 316 | 298 | ||||||
| $ | 6,240 | $ | 6,076 | |||||
| October 31, 2011 | October 31, 2010 | |||||||
Intangibles, net | $ | 10,771 | $ | 2,872 | ||||
Grower advances | 1,531 | 1,827 | ||||||
Loan to Agricola Belher | 3,380 | 1,225 | ||||||
Other | 440 | 316 | ||||||
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| |||||
| $ | 16,122 | $ | 6,240 | |||||
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| |||||
Intangible assets in the accompanying consolidated financial statements includedconsist of the following intangible assets: customer list, trade name and non-competition agreements of $2.2 million (accumulated amortization of $1.1 million), brand name intangibles of $0.3 million, trade secrets of $1.4 million (accumulated amortization of $0.1 million) and a customer list of $0.2 million. The customer-related, trade name and non-competition agreements are being amortized over periods up to 10 years, the trade secrets are being amortized over 13 years and the customer list is being amortized over 7 years. The intangible asset related to the brand name currently has an indefinite life and, as a result, is not currently subject to amortization. (in thousands):
| October 31, 2011 | October 31, 2010 | |||||||||||||||||||||||||
| Weighted- Average Useful Life | Gross Carrying Value | Accum. Amortization | Net Book Value | Gross Carrying Value | Accum. Amortization | Net Book Value | ||||||||||||||||||||
Customer list/relationships | 8.0 years | $ | 7,640 | $ | (445 | ) | $ | 7,195 | $ | 240 | $ | (26 | ) | $ | 214 | |||||||||||
Trade names | 8.4 years | 3,009 | (1,207 | ) | 1,802 | 2,087 | (989 | ) | 1,098 | |||||||||||||||||
Trade secrets/recipes | 11.9 years | 1,520 | (205 | ) | 1,315 | 1,350 | (78 | ) | 1,272 | |||||||||||||||||
Brand name intangibles | indefinite | 275 | — | 275 | 275 | — | 275 | |||||||||||||||||||
Non-competition agreements | 5.0 years | 267 | (83 | ) | 184 | 67 | (54 | ) | 13 | |||||||||||||||||
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| |||||||||||||||
Intangibles, net | $ | 12,711 | $ | (1,940 | ) | $ | 10,771 | $ | 4,019 | $ | (1,147 | ) | $ | 2,872 | ||||||||||||
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We recorded amortization expense of approximately $291,000, $171,000,$0.8 million, $0.3 million, and $247,000$0.2 million for fiscal years 2011, 2010, 2009, and 2008.2009. We anticipate recording amortization expense of approximately $318,000$1.4 million for each of amortization expense for fiscal year 2011 and $305,000 of amortization expense forthe fiscal years 2012 through 2015. We anticipate recording amortization expense of approximately $1.3 million for fiscal year 2016. The remainder of approximately $1,058,000$3.5 million will be amortized over fiscal years 20162017 through 2023.
46
6. Revolving Credit Facilities
Effective May 31, 2011, the Company and May 2008,Farm Credit West, PCA (FCW), entered into a Term Revolving Credit Agreement (Revolving Agreement). Under the terms of the Revolving Agreement, we renewed and/or extendedare advanced funds for working capital purposes, the purchase and installation of capital items, as well as other corporate needs of the Company. Total credit available under the borrowing agreement is $40 million, up from $30 million, and expires on February 1, 2016. This increase was at our non-collateralized, revolving credit facilities withrequest and not due to any immediate cash flows needs.
Effective September 30, 2011, the Company and Bank of America, N.A. (BoA), entered into an agreement, Amendment No. 4 to Loan Agreement (the Agreement), which amended our existing credit facility with BoA. Under the terms of the Agreement, we are advanced funds primarily for working capital purposes. Total credit available under the borrowing agreement is now $25 million, up from $15 million and Farm Credit West, PCA. These two credit facilities expire in July 2011now expires on February 1, 2016. This increase was at our request and February 2012. not due to any immediate cash flows needs.
Under the terms of these agreements, we are advanced funds for both working capital the purchase and installation of capital items, and/or other corporate needs of the Company. In July 2009, ourlong-term productive asset purchases. Total credit available under these combined borrowing agreements was increased from $40 million to $45$65 million, with a weighted-average interest rate of 1.6% and 2.3% at October 31, 20102011 and 2.4% at October 31, 2009.2010. Under these credit facilities, we had $17.9 million and $8.2 million and $12.0 million outstanding at October 31, 2010 and 2009, of which $6.5 million was classified as a long-term liability as October 31, 2009.2011 and 2010. These credit facilities contain various financial covenants, the most significant relating to tangible net worthTangible Net Worth (as defined), Current Ratio (as defined), and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)Fixed Charge Coverage Ratio (as defined) (as defined). We were in compliance with all such covenants at October 31, 2010.
7. Employee Benefit Plans
We sponsor two defined contribution retirement plans for salaried and hourly employees. As a result of the acquisition of RFG, we have three additional defined contribution retirement plans bringing the total to five. Expenses for these plans approximated $733,000, $639,000, $557,000, and $604,000$557,000 for fiscal years 2011, 2010 2009 and 2008,2009, which are included in selling, general and administrative expenses in the accompanying financial statements.
We also sponsor a non-qualified defined benefit plan for two retired executives. Pension expenses, including actuarial losses, approximated $35,000, $34,000 and $48,000 for the year ended October 31, 2011, 2010, and 2009. Pension income, including actuarial gains approximated $36,000 for the years ended October 31, 2008. These amounts are included in selling, general and administrative expenses in the accompanying financial statements.
Components of the change in projected benefit obligation for fiscal year ends consist of the following (in thousands):
| 2010 | 2009 | |||||||
| Change in projected benefit obligation: | ||||||||
| Projected benefit obligation at beginning of year | $ | 283 | $ | 279 | ||||
| Interest cost | 16 | 18 | ||||||
| Actuarial loss | 18 | 30 | ||||||
| Benefits paid | (42 | ) | (44 | ) | ||||
| Projected benefit obligation at end of year (unfunded) | $ | 275 | $ | 283 | ||||
44
| 2011 | 2010 | |||||||
Change in projected benefit obligation: | ||||||||
Projected benefit obligation at beginning of year | $ | 275 | $ | 283 | ||||
Interest cost | 13 | 16 | ||||||
Actuarial loss | 22 | 18 | ||||||
Benefits paid | (42 | ) | (42 | ) | ||||
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| |||||
Projected benefit obligation at end of year (unfunded) | $ | 268 | $ | 275 | ||||
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| |||||
| 2010 | 2009 | |||||||
| Projected benefit obligation | $ | 275 | $ | 283 | ||||
| Unrecognized net (gain) loss | — | — | ||||||
| Recorded pension liabilities | $ | 275 | $ | 283 | ||||
| 2011 | 2010 | |||||||
Projected benefit obligation | $ | 268 | $ | 275 | ||||
Unrecognized net (gain) loss | — | — | ||||||
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| |||||
Recorded pension liabilities | $ | 268 | $ | 275 | ||||
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| |||||
Significant assumptions used in the determination of pension expense consist of the following:
| 2010 | 2009 | |||||||
| Discount rate on projected benefit obligation | 5.00 | % | 5.25 | % | ||||
| 2011 | 2010 | |||||||
Discount rate on projected benefit obligation | 4.00 | % | 5.00 | % | ||||
47
8. Commitments and Contingencies
Commitments and guarantees
We lease facilities and certain equipment under non cancelable operating leases expiring at various dates through 2021. We are committed to make minimum cash payments under these agreements as of October 31, 20102011, as follows (in thousands):
| 2011 | $ | 1,480 | ||
| 2012 | 1,378 | |||
| 2013 | 1,365 | |||
| 2014 | 1,297 | |||
| 2015 | 1,216 | |||
| Thereafter | 4,756 | |||
| $ | 11,492 | |||
2012 | $ | 2,662 | ||
2013 | 2,659 | |||
2014 | 2,551 | |||
2015 | 2,422 | |||
2016 | 1,959 | |||
Thereafter | 7,433 | |||
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| |||
| $ | 19,686 | |||
|
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Total rent expense amounted to approximately $2.1 million, $1.7 million $1.8 million and $1.7$1.8 million for the years ended October 31, 2011, 2010, 2009, and 2008.2009. Rent to Limoneira, for our corporate office, amounted to approximately $0.2$0.3 million for fiscal year 2011. For fiscal years 2010 and 2009, and 2008.rent to Limoneira amounted to approximately $0.2 million. We are committed to rent our corporate facility through fiscal 2015 at an annual rental of $0.2$0.3 million per annum (subject to annual CPI increases, as defined).
Through the acquisition of RFG in June 2011, we have two additional facilities in California, one being the corporate office of RFG in Rancho Cordova, and the other being a fresh processing facility in Sacramento. RFG also has one other fresh processing facility in Houston, Texas. Both facilities process cut fruits and vegetables, salads, sandwiches, and wraps. The RFG corporate office in Rancho Cordova has an operating lease through September 2015. Total rent for fiscal 2011 was approximately $0.1 million. The processing facility in Sacramento has an operating lease through May 2021. Total rent for fiscal 2011 was approximately $0.2 million. The processing facility in Houston has an operating lease through May 2021. Total rent for fiscal 2011 was approximately $0.1 million.
We indemnify our directors and officers and have the power to indemnify each of our employees and other agents, to the maximum extent permitted by applicable law. The maximum amount of potential future payments under such indemnifications is not determinable. No amounts have been accrued in the accompanying financial statements related to these indemnifications.
Litigation
Hacienda Suits— We are currently under examination by the Mexican tax authorities (Hacienda) for the tax yearyears ended December 31, 2000. We have2004, and 2005.
During the third quarter of fiscal year 2011, we received an assessment totaling approximately $2.0 millionupdate from Hacienda related toour outside legal counsel regarding the amountexamination of income at our Mexican subsidiary. Subsequent to that initial assessment, the Hacienda offered a settlement of approximately $400,000, which we declined. In the second quarter of 2009, we won our appeal case. The Hacienda subsequently appealed that decision and the case was sent back to the tax court due to administrative error by such jurisdiction. During the second quarter of 2010, we once again won our appeal and, once again, the Hacienda appealed the decision and the case has been sent back to the tax court. We do not believe that the resolution of this examination will have a significant impact on our results of operations.
45
In the first quarter of fiscal 2011, we received an assessment totaling approximately $720,000 related to the tax year ended December 31, 2005. This assessment relates to depreciation expense taken on suchour 2005 tax return. Based on discussions with legal counsel, we believe that the Hacienda’s position is without merit and do not believe that the resolution of this examination will have a significant impact on our results of operations.
48
The Hacienda has concluded their examination for the year ended December 31, 2007, noting no changes. In addition, during the fourth quarter of fiscal 2011, the examination of the tax year ended December 31, 2000 was settled by the court in our CalavoFoods building located in Uruapan, Michoacan, Mexico as collateral to the Hacienda in regards to these assessments.
From time to time, we are also 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.
9. Related-Party Transactions
Certain members of our Board of Directors market avocados through Calavo pursuant to our customary marketing agreements.agreements substantially similar to the marketing agreements that we enter into with other growers. During the years ended October 31, 2011, 2010, 2009 and 2008,2009, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $18.6 million, $23.9 million $7.2 million, and $11.9$7.2 million. Accounts payable to these Board members was $0.1 million and $1.3 million as of October 31, 2011, and 2010. We did not have an accounts payable balance to these Board member as of October 31, 2009.
During fiscal 2011, 2010 2009 and 2008,2009, we received $0.2 million, $0.1$0.2 million, and $0.6$0.1 million as dividend income from Limoneira.
The three previous owners and current executives of RFG have a majority ownership of certain entities that provide various services to RFG. RFG’s California operating facility leases a building from LIG partners, LLC (LIG) pursuant to an operating lease. LIG is majority owned by an entity owned by such three executives of RFG. For the year ended October 31, 2011, since the acquisition of RFG, total rent paid to LIG was $0.2 million. Additionally, RFG sells cut produce and purchases raw materials, obtains transportation services, and shares costs for certain utilities with Third Coast Fresh Distribution (Third Coast). Third Coast is majority owned by an entity owned by such three executives of RFG. For the year ended October 31, 2011, total sales made to Third Coast were $1.1 million. For the year ended October 31, 2011, total purchases made from Third Coast were $0.4 million. Amounts due from Third Coast were $0.3 million as of October 31, 2011. Amounts due to Third Coast were $0.2 million as of October 31, 2011.
10. Income Taxes
The income tax provision consists of the following for the years ended October 31 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 7,988 | $ | 6,305 | $ | 2,639 | ||||||
| State | 1,868 | 1,522 | 615 | |||||||||
| Foreign | 153 | 160 | 251 | |||||||||
| Total current | 10,009 | 7,987 | 3,505 | |||||||||
| Deferred | 1,332 | 290 | 1,062 | |||||||||
| Total income tax provision | $ | 11,341 | $ | 8,277 | $ | 4,567 | ||||||
| 2011 | 2010 | 2009 | ||||||||||
Current: | ||||||||||||
Federal | $ | 4,405 | $ | 7,988 | $ | 6,305 | ||||||
State | 1,107 | 1,868 | 1,522 | |||||||||
Foreign | (170 | ) | 153 | 160 | ||||||||
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| |||||||
Total current | 5,342 | 10,009 | 7,987 | |||||||||
Deferred | 1,907 | 1,332 | 290 | |||||||||
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| |||||||
Total income tax provision | $ | 7,249 | $ | 11,341 | $ | 8,277 | ||||||
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| |||||||
At October 31, 20102011 and 2009,2010, gross deferred tax assets totaled approximately $3.0$2.7 million and $3.0 million, while gross deferred tax liabilities totaled approximately $9.0$8.8 million and $3.3$9.0 million. Deferred income taxes reflect the net of temporary differences between the carrying amount of assets and liabilities for financial reporting and income tax purposes.
Significant components of our deferred taxes assets (liabilities) as of October 31, 2010 and 2009 are as follows (in thousands):
| 2010 | 2009 | |||||||
| Allowances for accounts receivable | $ | 609 | $ | 1,568 | ||||
| Inventories | 662 | 283 | ||||||
| State taxes | 470 | 342 | ||||||
| Intangible assets | — | 73 | ||||||
| Accrued liabilities | 595 | 462 | ||||||
| Current deferred income taxes | $ | 2,336 | $ | 2,728 | ||||
| Property, plant, and equipment | (3,775 | ) | (2,732 | ) | ||||
| Intangible assets | (76 | ) | (178 | ) | ||||
| Unrealized gain, Limoneira investment | (4,586 | ) | (292 | ) | ||||
| Retirement benefits | — | (83 | ) | |||||
| Stock-based compensation | 125 | 250 | ||||||
| Other | 46 | 3 | ||||||
| Long-term deferred income taxes | $ | (8,266 | ) | $ | (3,032 | ) | ||
46
| 2011 | 2010 | |||||||
Allowances for accounts receivable | $ | 564 | $ | 609 | ||||
Inventories | 435 | 662 | ||||||
State taxes | 276 | 470 | ||||||
Accrued liabilities | 861 | 595 | ||||||
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| |||||
Current deferred income taxes | $ | 2,136 | $ | 2,336 | ||||
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| |||||
Property, plant, and equipment | (5,258 | ) | (3,775 | ) | ||||
Intangible assets | (312 | ) | (76 | ) | ||||
Unrealized gain, Limoneira investment | (2,614 | ) | (4,586 | ) | ||||
Stock-based compensation | 183 | 125 | ||||||
Other | (1 | ) | 46 | |||||
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| |||||
Long-term deferred income taxes | $ | (8,002 | ) | $ | (8,266 | ) | ||
|
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| |||||
49
| 2010 | 2009 | 2008 | ||||||||||
| Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State taxes, net of federal effects | 4.8 | 4.9 | 4.3 | |||||||||
| Foreign income taxes greater (less) than U.S. | (0.9 | ) | (1.1 | ) | (1.2 | ) | ||||||
| Benefit of lower federal tax brackets | — | — | (0.6 | ) | ||||||||
| Other | 0.2 | (1.0 | ) | (0.3 | ) | |||||||
| 39.1 | % | 37.8 | % | 37.2 | % | |||||||
| 2011 | 2010 | 2009 | ||||||||||
Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes, net of federal effects | 4.8 | 4.8 | 4.9 | |||||||||
Foreign income taxes greater (less) than U.S. | (0.9 | ) | (0.9 | ) | (1.1 | ) | ||||||
Other | 0.9 | 0.2 | (1.0 | ) | ||||||||
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| |||||||
| 39.8 | % | 39.1 | % | 37.8 | % | |||||||
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We intend to reinvest our accumulated foreign earnings, which approximated $6.2$7.6 million at October 31, 2010,2011, indefinitely. As a result, we have not provided any deferred income taxes on such unremitted earnings. For fiscal years 2011, 2010 2009 and 2008,2009, income before income taxes related to domestic operations was approximately $17.1 million, $28.3 million, $21.0 million, and $10.9$21.0 million. For fiscal years 2011, 2010 2009 and 2008,2009, income before income taxes related to foreign operations was approximately $1.1 million, $0.7 million and $0.9 million and $1.4 million.
As of October 31, 20102011 and 2009,2010, we provided a liability ofless than $0.1 million for unrecognized tax benefits related to various federal and state income tax matters. The tax effected amount would reduce our effective income tax rate if recognized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Balance at November 1, 2008 | $ | 107 | ||
| Additions for tax positions of prior years | (4 | ) | ||
| Balance at October 31, 2009 | 103 | |||
| Balance at October 31, 2010 | $ | 103 | ||
Balance at November 1, 2009 | $ | 103 | ||
Balance at October 31, 2010 | 103 | |||
Reductions of tax positions from prior years | (62 | ) | ||
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| |||
Balance at October 31, 2011 | $ | 41 | ||
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We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. For fiscal 20102011 and 2009,2010, we did not record any significant accrued interest and penalties. We do not expect any unrecognized tax benefits to reverse in fiscal 2011.
We are subject to U.S. federal income tax as well as income of multiple state tax jurisdictions. We are no longer subject to U.S. income tax examinations for the fiscal years prior to fiscal year October 31, 2007,2008, and are no longer subject to state income tax examinations for fiscal years prior to October 31, 2006.
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11. Segment Information
We report our operations in two different business segments: Fresh products and CalavoFoods.Calavo Foods. These two business segments are presented based on how information is used by our presidentChief Executive Officer to measure performance and allocate resources. The Fresh products segment includes all operations that involve the distribution of avocados grown both inside and outside of California, as well as the distribution of other non-processed, perishable foodfresh produce products. The CalavoFoodsCalavo Foods segment represents all operations related to the purchase, manufacturing, and distribution of processed avocadoprepared products, including guacamole, tortilla chips, salsa, fresh-cut fruit, ready-to-eat vegetables, recipe-ready vegetables and deli meat products. Additionally, selling, general and administrative expenses, andas well as other non-operating lineincome/expense items, are not charged directly, nor allocated to, a specific product line. These items are now evaluated by our president onlyChief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them to, our operating segments.
47
| Fresh | Calavo- | |||||||||||
| products | Foods | Total | ||||||||||
| (All amounts are presented in thousands) | ||||||||||||
Year ended October 31, 2010 | ||||||||||||
| Net sales | $ | 348,052 | $ | 50,299 | $ | 398,351 | ||||||
| Cost of sales | 309,609 | 37,212 | 346,821 | |||||||||
| Gross margin | $ | 38,443 | $ | 13,087 | $ | 51,530 | ||||||
Year ended October 31, 2009 | ||||||||||||
| Net sales | $ | 300,235 | $ | 44,530 | $ | 344,765 | ||||||
| Cost of sales | 271,159 | 29,073 | 300,232 | |||||||||
| Gross margin | $ | 29,076 | $ | 15,457 | $ | 44,533 | ||||||
Year ended October 31, 2008 | ||||||||||||
| Net sales | $ | 315,667 | $ | 45,807 | $ | 361,474 | ||||||
| Cost of sales | 293,444 | 34,849 | 328,293 | |||||||||
| Gross margin | $ | 22,223 | $ | 10,958 | $ | 33,181 | ||||||
| Year ended October 31, 2010 | Year ended October 31, 2009 | |||||||||||||||||||||||
| Fresh | Calavo- | Fresh | Calavo- | |||||||||||||||||||||
| products | Foods | Total | products | Foods | Total | |||||||||||||||||||
| Third-party sales: | ||||||||||||||||||||||||
| Avocados | $ | 287,808 | $ | — | $ | 287,808 | $ | 259,558 | $ | — | $ | 259,558 | ||||||||||||
| Tomatoes | 41,595 | — | 41,595 | 14,067 | — | 14,067 | ||||||||||||||||||
| Papayas | 11,278 | — | 11,278 | 9,118 | — | 9,118 | ||||||||||||||||||
| Pineapples | 3,838 | — | 3,838 | 13,341 | — | 13,341 | ||||||||||||||||||
| Other Fresh products | 3,617 | — | 3,617 | 4,219 | — | 4,219 | ||||||||||||||||||
| CalavoFoods — food service | — | 40,654 | 40,654 | — | 36,493 | 36,493 | ||||||||||||||||||
| CalavoFoods — retail and club | — | 17,473 | 17,473 | — | 15,554 | 15,554 | ||||||||||||||||||
| Total gross sales | 348,136 | 58,127 | 406,263 | 300,303 | 52,047 | 352,350 | ||||||||||||||||||
| Less sales incentives | (84 | ) | (7,828 | ) | (7,912 | ) | (68 | ) | (7,517 | ) | (7,585 | ) | ||||||||||||
| Net sales | $ | 348,052 | $ | 50,299 | $ | 398,351 | $ | 300,235 | $ | 44,530 | $ | 344,765 | ||||||||||||
| Year ended October 31, 2009 | Year ended October 31, 2008 | |||||||||||||||||||||||
| Fresh | Calavo- | Fresh | Calavo- | |||||||||||||||||||||
| products | Foods | Total | products | Foods | Total | |||||||||||||||||||
| Third-party sales: | ||||||||||||||||||||||||
| Avocados | $ | 259,558 | $ | — | $ | 259,558 | $ | 268,674 | $ | — | $ | 268,674 | ||||||||||||
| Tomatoes | 14,067 | — | 14,067 | 19,666 | — | 19,666 | ||||||||||||||||||
| Papayas | 9,118 | — | 9,118 | 8,392 | — | 8,392 | ||||||||||||||||||
| Pineapples | 13,341 | — | 13,341 | 16,442 | — | 16,442 | ||||||||||||||||||
| Other Fresh products | 4,219 | — | 4,219 | 2,564 | — | 2,564 | ||||||||||||||||||
| CalavoFoods — food service | — | 36,493 | 36,493 | — | 38,919 | 38,919 | ||||||||||||||||||
| CalavoFoods — retail and club | — | 15,554 | 15,554 | — | 14,634 | 14,634 | ||||||||||||||||||
| Total gross sales | 300,303 | 52,047 | 352,350 | 315,738 | 53,553 | 369,291 | ||||||||||||||||||
| Less sales incentives | (68 | ) | (7,517 | ) | (7,585 | ) | (71 | ) | (7,746 | ) | (7,817 | ) | ||||||||||||
| Net sales | $ | 300,235 | $ | 44,530 | $ | 344,765 | $ | 315,667 | $ | 45,807 | $ | 361,474 | ||||||||||||
| Fresh products | Calavo Foods(1) | Total | ||||||||||
| (All amounts are presented in thousands) | ||||||||||||
Year ended October 31, 2011(1) | ||||||||||||
Net sales | $ | 420,658 | $ | 101,871 | $ | 522,529 | ||||||
Cost of sales | 388,820 | 90,848 | 479,668 | |||||||||
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Gross margin | $ | 31,838 | $ | 11,023 | $ | 42,861 | ||||||
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Year ended October 31, 2010 | ||||||||||||
Net sales | $ | 348,052 | $ | 50,299 | $ | 398,351 | ||||||
Cost of sales | 309,609 | 37,212 | 346,821 | |||||||||
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| |||||||
Gross margin | $ | 38,443 | $ | 13,087 | $ | 51,530 | ||||||
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Year ended October 31, 2009 | ||||||||||||
Net sales | $ | 300,235 | $ | 44,530 | $ | 344,765 | ||||||
Cost of sales | 271,159 | 29,073 | 300,232 | |||||||||
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Gross margin | $ | 29,076 | $ | 15,457 | $ | 44,533 | ||||||
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| (1) | Includes net sales and gross margin of $56.7 million and $4.3 million in fiscal 2011 related to the recently acquired business RFG. See Note 17 for additional information related to the acquisition of RFG. |
For fiscal years 2011, 2010 and 2009, inter-segment sales and 2008,cost of sales of $50.1 million, $21.1 million, and $21.9 million were eliminated in consolidation.
51
The following table sets forth sales by product category, by segment (in thousands):
| Year ended October 31, 2011 | Year ended October 31, 2010 | |||||||||||||||||||||||
| Fresh products | Calavo Foods(1) | Total | Fresh products | Calavo Foods | Total | |||||||||||||||||||
Third-party sales: | ||||||||||||||||||||||||
Avocados | $ | 376,104 | $ | — | $ | 376,104 | $ | 287,808 | $ | — | $ | 287,808 | ||||||||||||
Tomatoes | 23,903 | — | 23,903 | 41,595 | — | 41,595 | ||||||||||||||||||
Papayas | 13,245 | — | 13,245 | 11,278 | — | 11,278 | ||||||||||||||||||
Pineapples | 4,278 | — | 4,278 | 3,838 | — | 3,838 | ||||||||||||||||||
Other Fresh products | 3,276 | — | 3,276 | 3,617 | — | 3,617 | ||||||||||||||||||
Calavo Foods - food service | — | 37,431 | 37,431 | — | 40,654 | 40,654 | ||||||||||||||||||
Calavo Foods - retail and club(1) | — | 73,924 | 73,924 | — | 17,473 | 17,473 | ||||||||||||||||||
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Total gross sales | 420,806 | 111,355 | 532,161 | 348,136 | 58,127 | 406,263 | ||||||||||||||||||
Less sales incentives | (148 | ) | (9,484 | ) | (9,632 | ) | (84 | ) | (7,828 | ) | (7,912 | ) | ||||||||||||
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Net sales | $ | 420,658 | $ | 101,871 | $ | 522,529 | $ | 348,052 | $ | 50,299 | $ | 398,351 | ||||||||||||
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| Year ended October 31, 2010 | Year ended October 31, 2009 | |||||||||||||||||||||||
| Fresh products | Calavo Foods | Total | Fresh products | Calavo Foods | Total | |||||||||||||||||||
Third-party sales: | ||||||||||||||||||||||||
Avocados | $ | 287,808 | $ | — | $ | 287,808 | $ | 259,558 | $ | — | $ | 259,558 | ||||||||||||
Tomatoes | 41,595 | — | 41,595 | 14,067 | — | 14,067 | ||||||||||||||||||
Papayas | 11,278 | — | 11,278 | 9,118 | — | 9,118 | ||||||||||||||||||
Pineapples | 3,838 | — | 3,838 | 13,341 | — | 13,341 | ||||||||||||||||||
Other Fresh products | 3,617 | — | 3,617 | 4,219 | — | 4,219 | ||||||||||||||||||
Calavo Foods - food service | — | 40,654 | 40,654 | — | 36,493 | 36,493 | ||||||||||||||||||
Calavo Foods - retail and club | — | 17,473 | 17,473 | — | 15,554 | 15,554 | ||||||||||||||||||
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Total gross sales | 348,136 | 58,127 | 406,263 | 300,303 | 52,047 | 352,350 | ||||||||||||||||||
Less sales incentives | (84 | ) | (7,828 | ) | (7,912 | ) | (68 | ) | (7,517 | ) | (7,585 | ) | ||||||||||||
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Net sales | $ | 348,052 | $ | 50,299 | $ | 398,351 | $ | 300,235 | $ | 44,530 | $ | 344,765 | ||||||||||||
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| (1) | Includes net sales of $56.7 million in fiscal 2011 related to the recently acquired business Renaissance Food Group, LLC (RFG). See Note 17 for additional information related to the acquisition of RFG. |
Net sales to third parties by segment exclude inter-segment sales and cost of sales. For fiscal years 2011, 2010, and 2009, inter-segment sales and cost of sales for Fresh products totaling $15.8 million, $11.7 million $14.1 million and $13.9$14.1 million were eliminated. For fiscal years 2011, 2010, 2009, and 2008,2009, inter-segment sales and cost of sales for CalavoFoodsCalavo Foods totaling $34.3 million $9.4 million, $7.8 million, and $9.6$7.8 million were eliminated.
Sales to customers outside the United States were approximately $24.3 million, $16.3$24.3 million and $27.3$16.3 million for fiscal years 2011, 2010, 2009, and 2008.
Long-lived assets attributed to geographic areas as of October 31, are as follows (in thousands):
| United States | Mexico | Consolidated | ||||||||||
| 2010 | $ | 24,816 | $ | 16,243 | $ | 41,059 | ||||||
| 2009 | $ | 22,748 | $ | 15,873 | $ | 38,621 | ||||||
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| United States | Mexico | Consolidated | ||||||||||
2011 | $ | 30,494 | $ | 16,597 | $ | 47,091 | ||||||
2010 | $ | 24,816 | $ | 16,243 | $ | 41,059 | ||||||
Long-term obligations at fiscal year ends consist of the following (in thousands):
| 2010 | 2009 | |||||||
| Farm Credit West, PCA, term loan, bearing interest at 5.7% | $ | 6,500 | $ | 7,800 | ||||
| Farm Credit West, PCA, long-term portion of revolving credit facility (Note 6) | — | 6,450 | ||||||
| Capital Lease, bearing interest at 4.3% at October 31, 2010 and 2009 | 958 | 1,024 | ||||||
| 7,458 | 15,274 | |||||||
| Less current portion | (1,369 | ) | (1,366 | ) | ||||
| $ | 6,089 | $ | 13,908 | |||||
| 2011 | 2010 | |||||||
Farm Credit West, PCA, (FCW) term loan, bearing interest at 1.7% | $ | 7,012 | $ | — | ||||
Bank of America, N.A. (BoA) term loan, bearing interest at 1.7% | 7,135 | — | ||||||
FCW, term loan, bearing interest at 5.7% | 5,200 | 6,500 | ||||||
Capital leases | 4,345 | 958 | ||||||
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| 23,692 | 7,458 | |||||||
Less current portion | (5,448 | ) | (1,369 | ) | ||||
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| $ | 18,244 | $ | 6,089 | |||||
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See Note 17 for discussion regarding our acquisition of RFG. In July 2005, weconjunction with such acquisition, the Company and FCW entered into a non-collateralized term loan agreement with Farm Credit West, PCA to financeTerm Loan Agreement (Term Agreement), effective May 31, 2011. Under the terms of the Term Agreement, we were advanced $15 million for the purchase of RFG. Additionally, we are required to make 60 monthly principal and interest payments, in the amount billed, from July 1, 2011 to June 1, 2016. There is no prepayment penalty associated with this Term Agreement.
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This Term Agreement also replaces in its entirety the original Term Loan Agreement dated June 1, 2005 by and between the Company and FCW. There was no significant change in terms between the original Term Loan Agreement and this new agreement.
Effective September 30, 2011, the Company and Bank of America, N.A. (BoA), entered into an agreement, Amendment No. 4 to Loan Agreement (the Agreement), which amended our Limoneira Stock. Pursuantexisting credit facility with BoA. In addition, the Agreement includes a variable rate term loan in the amount of approximately $7.1 million. These proceeds were used to such agreement, we borrowed $13.0 million, which is to be repaid in 10 annual installments of $1.3 million. Such annual installments began July 2006 and continue through July 2015. Interest is paid monthly, in arrears, and began in August 2005, and will continue through the liferetire approximately 50% of the loan. Such loan bears interest at a fixed rateoutstanding balance (as of 5.70%.
In conjunction with the purchase of RFG, we assumed various capital leases related to machinery and equipment. These leases bear interest at a weighted average interest rate of approximately 4.0%. WeThe total obligation acquired related to these capital leases were $4.0 million, with $1.1 million being classified as in compliance with all such covenants at October 31, 2010.
At October 31, 2010,2011, annual debt payments are scheduled as follows (in thousands):
| Total | ||||
| Year ending October 31: | ||||
| 2011 | $ | 1,369 | ||
| 2012 | 1,373 | |||
| 2013 | 1,376 | |||
| 2014 | 1,380 | |||
| 2015 | 1,383 | |||
| Thereafter | 577 | |||
| $ | 7,458 | |||
| Total | ||||
Year ending October 31: | ||||
2012 | $ | 5,448 | ||
2013 | 5,384 | |||
2014 | 5,264 | |||
2015 | 4,952 | |||
2016 | 2,153 | |||
Thereafter | 491 | |||
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| $ | 23,692 | |||
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13. Stock-Based Compensation
| Weighted-Average | ||||||||
| Number of Shares | Exercise Price | |||||||
| Outstanding at October 31, 2007 | 49 | $ | 7.00 | |||||
| Exercised | (25 | ) | $ | 7.00 | ||||
| Forfeited | (24 | ) | $ | 7.00 | ||||
| Outstanding at October 31, 2008 | — | |||||||
The Employee Stock Purchase Plan
The employee stock purchase plan was approved by our Board of Directors and shareholders. Participation in the employee stock purchase plan is limited to employees. The plan provides the Board of Directors, or a plan administrator, the right to make available up to 2,000,000 shares of common stock at a price not less than fair market value. In March 2002, the Board of Directors awarded selected employees the opportunity to purchase up to 474,000 shares of common stock at $7.00 per share, the closing price of our common stock on the date prior to the grant. The plan also permits us to advance all or some of the purchase price of the purchased stock to the employee upon the execution of a full-recourse note at prevailing interest rates. These awards expired in April 2002, with
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The 2005 Stock Incentive Plan, was a stock-based compensation plan, under which employees and directors may be granted options to purchase shares of Calavo Growers, Inc. (the “2005 Plan”) was approved by our Boardcommon stock. We anticipate terminating such plan in the near future.
Stock options are granted with exercise prices of Directorsnot less than the fair market value at grant date, generally vest over one to five years and shareholders. The 2005 Plan authorizesgenerally expire two to five years after the grantinggrant date. We settle stock option exercises with newly issued shares of common stock.
We measure compensation cost for all stock-based awards at fair value on the following typesdate of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to persons who are employees, officers, consultants, advisors, or directorsvest. We measure the fair value of Calavo Growers, Inc. or anyour stock based compensation awards on the date of its affiliates:
Subject to the adjustment provisions of the 2005 Plan that are applicable in the event of a stock dividend, stock split, reverse stock split or similar transaction, up to 2,500,000 shares of common stock may be issued under the 2005 Plan and no person shall be granted awards under the 2005 Plan during any 12-month period that cover more than 500,000 shares of common stock.
In December 2006, our Board of Directors approved the issuance of options to acquire a total of 20,000 shares of our common stock to two members of our Board of Directors. Each grant to acquire 10,000 shares vests in increments of 2,000 per annum over a five-year period and has an exercise price of $10.46 per share. Vested options have a term of five years from the vesting date. The market price of our common stock at the grant date was $10.46. The estimated fair market value of such option grant was approximately $40,000. The total compensation cost not yet recognized as of October 31, 20102011 was not significant.
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In May 2008, our Board of Directors approved the issuance of options to acquire a total of 58,000 shares of our common stock to three members of our Board of Directors. Each grant vests in equal increments over a five-year period and has an exercise price of $14.58 per share. Vested options have a term of five years from the vesting date. The market price of our common stock at the grant date was $14.58. The estimated fair market value of such option grants were approximately $184,000. The total compensation cost not yet recognized as of October 31, 20102011 was approximately $95,000,$55,000, which will be recognized over the remaining service period of 31 months
In December 2008, our Board of Directors approved the issuance of options to acquire a total of 10,000 shares of our common stock to one member of our Board of Directors. Such grant vests in equal increments over a five-year period and has an exercise price of $8.05 per share. Vested options have a term of five years from the vesting date. The market price of our common stock at the grant date was $8.05. The estimated fair market value of such option grant was approximately $37,000. The total compensation cost not yet recognized as of October 31, 20102011 was approximately $23,000,$15,000, which will be recognized over the remaining service period of 3725 months.
In August 2010, our Board of Directors approved the issuance of options to acquire a total of 10,000 shares of our common stock to one member of our Board of Directors. Such grant vests in equal increments over a five-year period and has an exercise price of $19.20 per share. Vested options have a term of five years from the vesting date. The market price of our common stock at the grant date was $19.20. The estimated fair market value of such option grant was approximately $64,000. The total compensation cost not yet recognized as of October 31, 20102011 was approximately $60,000,$44,000, which will be recognized over the remaining service period of 5745 months.
A summary of stock option activity is as follows (in thousands, except for share amounts):
| Weighted-Average | Weighted-Average | Aggregate | ||||||||||||||
| Number of Shares | Exercise Price | Fair-Value | Intrinsic Value | |||||||||||||
| Outstanding at October 31, 2007 | 333 | $ | 9.18 | |||||||||||||
| Granted | 58 | $ | 14.58 | $3.18/share | ||||||||||||
| Forfeited | (8 | ) | $ | 10.46 | ||||||||||||
| Exercised | (23 | ) | $ | 9.22 | ||||||||||||
| Outstanding at October 31, 2008 | 360 | $ | 10.02 | |||||||||||||
| Granted | 10 | $ | 8.05 | $3.67/share | ||||||||||||
| Exercised | (86 | ) | $ | 9.10 | ||||||||||||
| Outstanding at October 31, 2009 | 284 | $ | 10.23 | |||||||||||||
| Granted | 10 | $ | 19.20 | $6.36/share | ||||||||||||
| Exercised | (207 | ) | $ | 9.13 | ||||||||||||
| Outstanding at October 31, 2010 | 87 | $ | 13.89 | $ | 696 | |||||||||||
| Exercisable at October 31, 2010 | 28 | $ | 13.53 | $ | 236 | |||||||||||
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| Number of Shares | Weighted-Average Exercise Price | Weighted-Average Fair-Value | Aggregate Intrinsic Value | |||||||||||||
Outstanding at October 31, 2008 | 360 | $ | 10.02 | |||||||||||||
Granted | 10 | $ | 8.05 | $ | 3.67/share | |||||||||||
Exercised | (86 | ) | $ | 9.10 | ||||||||||||
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Outstanding at October 31, 2009 | 284 | $ | 10.23 | |||||||||||||
Granted | 10 | $ | 19.20 | $ | 6.36/share | |||||||||||
Exercised | (207 | ) | $ | 9.13 | ||||||||||||
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Outstanding at October 31, 2010 | 87 | $ | 13.89 | |||||||||||||
Exercised | (15 | ) | $ | 14.58 | ||||||||||||
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Outstanding at October 31, 2011 | 72 | $ | 13.75 | $ | 583 | |||||||||||
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Exercisable at October 31, 2011 | 31 | $ | 12.69 | $ | 284 | |||||||||||
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The 2011 Management Incentive Plan
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. Up to 1,500,000 shares of common stock may be issued by Calavo under the 2011 Plan. As a result of such new plan, no new awards will be made under our 2005 Stock Incentive Plan.
In April 2011, our Board of Directors approved the issuance of options to acquire a total of 60,000 shares of our common stock to each member of our board of directors, except Lee Cole Chief Executive Officer (CEO). Each non-employee director was granted 5,000 shares of options at $21.82 per share. Such grant vests over a one-year period. Vested options have a term of one year from the vesting date. The market price of our common stock at the grant date was $21.82. The estimated fair market value of shares vested during the year endedsuch option grant was approximately $202,000. The total compensation cost not yet recognized as of October 31, 20082011 was approximately $85,000, which will be recognized over the remaining service period of 5 months.
In October 2011, our Board of Directors approved the issuance of options to acquire a total of 10,000 shares of our common stock by one member of our Board of Directors. Such grant vests in equal increments over a five-year period and has an exercise price of
54
$21.80 per share. Vested options have a term of five years from the vesting date. The market price of our common stock at the grant date was $21.80. The estimated fair market value of such option grant was approximately $88,000. The total compensation cost not significant.
A summary of stock option activity, related to our 2011 Management Incentive Plan, is as follows (in thousands, except for per share amounts):
| Number of Shares | Weighted-Average Exercise Price | Weighted-Average Fair-Value | Aggregate Intrinsic Value | |||||||||||||
Granted | 70 | $ | 21.82 | $ | 4.15/share | |||||||||||
Forfeited Outstanding at October 31, 2011 |
| (5 65 | )
| $ $ | 21.82 21.82 |
| $ | — | ||||||||
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Exercisable at October 31, 2011 | — | $ | — | $ | — | |||||||||||
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The weighted average remaining life of such outstanding options is 1.6 years. No shares are vested or exercisable as of October 31, 2011.
14. Dividends
On December 12, 2011, we paid a $0.55 per share dividend in the aggregate amount of $8,123,000 to shareholders of record on December 2, 2011. On December 13, 2010, we paid a $0.55 per share dividend in the aggregate amount of $8,092,000 to shareholders of record on December 1, 2010. On December 11, 2009, we paid a $0.50 per share dividend in the aggregate amount of $7,252,000 to shareholders of record on December 1, 2009.
15. 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 (Level 3).
The following table sets forth our financial assets (there are noand liabilities requiring disclosure) as of October 31, 20102011 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (All amounts are presented in thousands) | ||||||||||||||||
Assets at Fair Value: | ||||||||||||||||
Investment in Limoneira Company(1) | $ | 34,986 | — | — | $ | 34,986 | ||||||||||
| Total assets at fair value | $ | 34,986 | $ | — | $ | — | $ | 34,986 | ||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (All amounts are presented in thousands) | ||||||||||||||||
Assets at Fair Value: | ||||||||||||||||
Investment in Limoneira Company(1) | $29,991 | — | — | $ | 29,991 | |||||||||||
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Total assets at fair value | $29,991 | $ | — | $ | — | $ | 29,991 | |||||||||
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| (1) | The investment in Limoneira Company consists of marketable securities in the Limoneira Company stock. We currently own approximately 15% of Limoneira’s outstanding common stock. These securities are measured at fair value by quoted market prices. Limoneira’s stock price at October 31, |
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (All amounts are presented in thousands) | ||||||||||||||||
Liabilities at Fair Value: | ||||||||||||||||
Salsa Lisa contingent consideration(2) | — | — | $ | 1,521 | $ | 1,521 | ||||||||||
| Total assets at fair value | $ | — | $ | — | $ | 1,521 | $ | 1,521 | ||||||||
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| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (All amounts are presented in thousands) | ||||||||||||||||
Liabilities at fair value: | ||||||||||||||||
Salsa Lisa contingent consideration(2) | — | — | $ | 978 | $ | 978 | ||||||||||
RFG contingent consideration(2) | — | — | $ | 1,652 | $ | 1,652 | ||||||||||
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Total liabilities at fair value | $ | — | $ | — | $ | 2,630 | $ | 2,630 | ||||||||
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| (2) | ||
| Each period we revalue the contingent consideration obligations to their fair value and record increases or decreases in the fair value into selling, general and administrative expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue and expense estimates. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period. Total net decrease to the contingent considerations in fiscal year 2011 totaled $0.5 million. See Note 16 and Note 17 for further discussion. |
The following is a reconciliation of the beginning and ending amounts of the contingent consideration for Salsa Lisa and RFG:
| Balance at 10/31/10 | Acquisition | Interest | Revalue Adjustment | Balance at 10/31/11 | ||||||||||||||||
| (All amounts are presented in thousands) | ||||||||||||||||||||
Salsa Lisa contingent consideration | $ | 1,521 | $ | — | $ | 70 | $ | (613 | ) | $ | 978 | |||||||||
RFG contingent consideration | — | 1,543 | 31 | 78 | 1,652 | |||||||||||||||
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Total | $ | 1,521 | $ | 1,543 | $ | 101 | $ | (535 | ) | $ | 2,630 | |||||||||
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16. Salsa Lisa Business Acquisition
On February 8, 2010, Calavo Growers, Inc. (“Calavo”)(Calavo), Calavo Salsa Lisa, LLC (“Calavo Salsa Lisa”)(CSL), Lisa’s Salsa Company (“LSC”)(LSC) and Elizabeth Nicholson and Eric Nicholson, entered into an Asset Purchase and Contribution Agreement, dated February 8, 2010 (the “Acquisition Agreement”)Acquisition Agreement), which sets forth the terms and conditions pursuant to which Calavo acquired a 65 percent ownership interest in newly created Calavo Salsa LisaCSL. which acquired substantially all of the assets of LSC. Elizabeth Nicholson and Eric Nicholson, through LSC, hold the remaining 35 percent ownership of Calavo Salsa Lisa.CSL. LSC is a regional producer in the upper Midwest United States of Salsa Lisa refrigerated salsas. We believe that this new line of salsas will further diversify our product offerings and will be a natural complement to our ultra-high-pressure guacamole, as well as our recently introduced Calavo tortilla chips.
The Acquisition Agreement provided that, among other things, Calavo make a payment totaling $100,000 for the 65 percent interest, as well a $300,000 payment representing a loan to be repaid from Calavo Salsa LisaCSL to Calavo. Calavo made these initial payments on February 8, 2010.
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| Then Earn-out | ||||
| Net Sales of: | Payment shall be: | |||
| $30,000,000 | $ | 1,000,000 | ||
| $40,000,000 | $ | 1,000,000 | ||
| $50,000,000 | $ | 1,000,000 | ||
| Maximum earn-out payment possible | $ | 3,000,000 | ||
Net Sales of: | Then Earn-out Payment shall be: | |||
$30,000,000 | $ | 1,000,000 | ||
$40,000,000 | $ | 1,000,000 | ||
$50,000,000 | $ | 1,000,000 | ||
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Maximum earn-out payment possible | $ | 3,000,000 | ||
More than one of the earn-out payments may be earned in a particular fiscal year through October 31, 2016, but in no event shall more than an aggregate of $3,000,000 in earn-out payments be made.
Concurrently with the execution of the Acquisition Agreement, Calavo, Calavo Salsa Lisa,CSL, LSC and Elizabeth Nicholson and Eric Nicholson entered into an Amended and Restated Limited Liability Company Agreement. Among other things, such agreement calls for the establishment and maintenance of capital accounts, how profits and losses are to be allocated, as well as a buy-out option for Calavo.
Such buy-out option grants Calavo the right to cause LSC to transfer to Calavo all of LSC’s membership interest for an amount equal to $5 million at any time until October 31, 2016. If the buy-out option has not been exercised by Calavo as of October 31, 2016, however, then Calavo is required to deliver a binding offer to LSC to purchase LSC’s membership interest for a price no less than an amount equal to (A) LSC’s percentage interest, multiplied by (B) the EBTDA multiple of 8.0, multiplied by (C) Calavo Salsa Lisa’sCSL’s earnings before taxes, depreciation, and amortization (EBTDA) for the year ending October 31, 2016. LSC may then elect to either accept such offer or reject such offer and submit a counter offer to purchase Calavo’s membership interest for a price no less than an amount equal to (A) Calavo’s membership interest, multiplied by (B) the EBTDA multiple of 8.0, plus 0.5, or 8.5, multiplied by (C) the Company EBTDA for the year ending October 31, 2016. LSC may not reject the buy-out offer without making a counter offer.
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If LSC makes a counter offer to Calavo, Calavo may either accept such offer or reject such offer and submit a counter offer to purchase LSC’s membership interest for a price no less than an amount equal to (A) LSC’s membership interest, multiplied by (B) the EBTDA multiple of 8,8.0, plus 0.5, plus an additional 0.5, or 9.0 total, multiplied by (C) the Company EBTDA for the year ending October 31, 2016. The process cited above shall continue, with the EBTDA multiple increasing 0.5% at each counter offer, until either LSC or Calavo accepts the counter offer made to them.
Based on the buy-out option, as well as the initial binding offer to be made to LSC, we recorded the noncontrolling interest outside of permanent equity to highlight the potential future cash obligation related to this instrument.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands). We obtained preliminary third-party valuations for the long-term assets acquired and incurred approximately $0.2 million in acquisition costs, which have been expensed in selling, general and administrative expenses in the period incurred.
At February 8, 2010
Current assets | $ | 263 | ||
Property, plant, and equipment | 321 | |||
Goodwill | 88 | |||
Intangible assets | 1,950 | |||
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| |||
Total assets acquired | 2,622 | |||
Current liabilities | (55 | ) | ||
Noncontrolling interest | (699 | ) | ||
Contingent consideration | (1,468 | ) | ||
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| |||
Net cash paid as of February 8, 2010 | $ | 400 | ||
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Of the $1,950,000 of intangible assets, $240,000 was assigned to customer relationships with a life of 7 years, $360,000 to trademarks and trade names with a life of 10 years, and $1,350,000 to trade secrets with a life of 13 years. We determined the fair value of the non-controlling interest in Calavo Salsa LisaCSL taking into consideration discounts for lack of control and lack of marketability. The fair value of the $5.0 million purchase option was determined using a Black-Scholes option pricing model. Significant inputs include the risk free rate, volatility factor, time to expiration, underlying stock price, and exercise price. As discussed above, we will be required to pay up to an additional $3.0 million if Calavo Salsa LisaCSL achieves specified revenue targets during the first seven years, post transaction. The fair value of this contingent consideration was determined based on a probability
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In October 2011, based on forecast projection analysis from a third party consulting firm, we decreased the contingent consideration liability related to the acquisition of CSL by approximately $0.6 million.
The following table reconciles shareholders’ equity attributable to noncontrolling interest (in thousands):
| Year ended | ||||
| October 31, 2010 | ||||
| Noncontrolling interest, beginning | $ | — | ||
| Net loss attributable to noncontrolling interest | (124 | ) | ||
| Capital contributions | 699 | |||
| Noncontrolling interest, ending | $ | 575 | ||
| Year ended October 31, 2011 | Year ended October 31, 2010 | |||||||
Noncontrolling interest, beginning | $ | 575 | $ | — | ||||
Capital contributions | — | 699 | ||||||
Net loss attributable to noncontrolling interest | (114 | ) | (124 | ) | ||||
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Noncontrolling interest, ending | $ | 461 | $ | 575 | ||||
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| |||||
17. RFG Business Acquisition
Calavo, CG Mergersub LLC (Newco), Renaissance Food Group, LLC (RFG) and Liberty Fresh Foods, LLC, Kenneth Catchot, Cut Fruit, LLC, James Catchot, James Gibson, Jose O. Castillo, Donald L. Johnson and RFG Nominee Trust (collectively, the Sellers) entered into an Agreement and Plan of Merger dated May 25, 2011 (the Acquisition Agreement), which sets forth the terms and conditions pursuant to which Calavo would acquire a 100 percent ownership interest in RFG. Pursuant to the Acquisition Agreement,
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Newco, a newly formed Delaware limited liability company and wholly-owned subsidiary of Calavo, merged with and into RFG, with RFG as the surviving entity. RFG is a fresh-food company that produces, markets, and distributes nationally a portfolio of healthy, high quality products for consumers via the retail channel. The acquisition closed on June 1, 2011.
Pursuant to the Acquisition Agreement and based on the fair value of Calavo’s common stock on June 1, 2011, we agreed to pay on the closing date approximately $16 million, payable in a combination of cash and shares of unregistered Calavo common stock, as described below in greater detail. In addition, if RFG attains specified financial goals for certain 12-month periods prior to the fifth anniversary of the closing, we have agreed to pay RFG approximately up to an additional $84 million in earn-out consideration, based on the fair value of Calavo’s common stock on June 1, 2011, payable in cash and shares of unregistered Calavo common stock, as described below in greater detail. As a result, if the maximum earn-out consideration is earned, the total consideration payable to RFG pursuant to the Acquisition Agreement could be approximately $100 million. The fair value of consideration is currently being determined by the Company and will be less than the maximum consideration noted above.
The Acquisition Agreement contains covenants, representations and warranties of Calavo and RFG that are customary for transactions of this type. Prior to entering into the Acquisition Agreement, and other than with respect to the Acquisition Agreement, neither we, nor any of our officers, directors, or affiliates had any material relationship with RFG or the Sellers.
We have paid the Sellers $14.2 million in cash, net of adjustments based on RFG’s financial condition at closing, and issued the Sellers 43,000 shares of unregistered Calavo common stock.
If RFG’s earnings before interest, taxes, depreciation and amortization (EBITDA) for any 12-month period commencing after the closing date and ending prior to the fifth anniversary of the closing date, is equal to or greater than $8 million, and RFG has concurrently reached a corresponding revenue achievement, we have agreed to pay the Sellers $5 million in cash and to issue to the Sellers 827,000 shares of unregistered Calavo common stock, representing total consideration of approximately $24 million. This represents the maximum that can be awarded pursuant to the 1st earn-out payment. In the event that the maximum EBITDA and revenue achievements have not been reached within five years after the closing date, but RFG’s 12-month EBITDA during such period equals or exceeds $6 million and RFG has concurrently reached a corresponding revenue achievement, a sliding-scale, as defined, will be used to calculate payment. The minimum amount to be paid in the sliding-scale related to the 1st earn-out payment is approximately $14 million, payable in both cash and shares of unregistered Calavo common stock. RFG has five years to achieve any consideration pursuant to the 1st earn-out payment.
Assuming that the maximum earn-out payment has been achieved in the 1st earn-out payment, if RFG’s EBITDA, for a 15-month period commencing after the closing date and ending prior to the fifth anniversary of the closing date, is equal to or greater than $15 million for each of the 12-month periods therein, and RFG has concurrently reached a corresponding revenue achievement, we have agreed to pay the Sellers $50 million in cash and to issue to the Sellers 434,783 shares of unregistered Calavo common stock, representing total consideration of approximately $60 million. This represents the maximum that can be awarded pursuant to the 2nd earn-out payment. In the event that the maximum EBITDA and revenue achievements have not been reached within five years after the closing date, but RFG’s 12-month EBITDA during such period equals or exceeds $10 million, and RFG has concurrently reached a corresponding revenue achievement, a sliding-scale will be used to calculate payment. The minimum amount to be paid in the sliding-scale related to the 2nd earn-out payment is approximately $27 million, payable in both cash and shares of unregistered Calavo common stock. RFG has five years to achieve any consideration pursuant to the 2nd earn-out payment.
The following table summarizes the estimated fair values of the assets acquired, liabilities assumed, and equity issued at the date of acquisition (in thousands). We obtained third-party valuations for the long-term assets acquired and incurred approximately $0.3 million in acquisition costs, which have been expensed in selling, general and administrative expenses in the period incurred. For the five months ended October 31, 2011, since the acquisition of RFG, total selling, general and administrative expenses for RFG was $3.1 million.
At June 1, 2011
Current assets | $ | 10,491 | ||
Property, plant, and equipment | 4,580 | |||
Goodwill | 14,264 | |||
Other assets | 117 | |||
Intangible assets | 8,690 | |||
|
| |||
Total assets acquired | 38,142 | |||
Current liabilities | (12,292 | ) | ||
Contingent consideration | (7,774 | ) | ||
Long-term obligations | (2,894 | ) | ||
Additional paid-in capital | (952 | ) | ||
|
| |||
Net assets acquired | $ | 14,230 | ||
|
|
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Of the $8,690,000 of intangible assets, an allocation of $7,400,000 was assigned to customer relationships with a life of 8 years, $920,000 to trademarks and trade names with a life of 8 years, $200,000 to non-competition agreements with a life of 5 years, and $170,000 to trade secrets with a life of 3 years. As discussed above, we potentially may be required to pay a maximum of approximately $100 million if RFG achieves specified future revenue and EBITDA targets. The fair value of this contingent consideration was determined based on a probability weighted method, which incorporates management’s forecasted revenue, and the likelihood of the revenue targets being achieved.
In October 2011, based on forecast projection analysis from a third party consulting firm, we increased the contingent consideration liability related to the acquisition of RFG by approximately $0.1 million.
18. Subsequent Events
We have evaluated subsequent events to assess the need for potential recognition or disclosure in this Annual Report on Form 10-K. Such events were evaluated tillthrough the date these financial statements were issued. Based upon this evaluation, it was determined that no subsequent events occurred that require recognition in the financial statements.
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The Board of Directors and Shareholders of Calavo Growers, Inc.
We have audited the accompanying consolidated balance sheets of Calavo Growers, Inc. and subsidiaries (the “Company”)Company) as of October 31, 20102011 and 2009,2010, and the related consolidated statements of income, comprehensive income, (loss), shareholders’ equity, and cash flows for each of the three years in the period ended October 31, 2010.2011. Our audits also included the financial statement schedule listed at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Calavo Growers, Inc. and subsidiaries at October 31, 20102011 and 2009,2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 2010,2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Calavo Growers Inc.’s internal control over financial reporting as of October 31, 2010,2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 13, 201117, 2012 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP | ||||
Los Angeles, California
January 13, 2011
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure 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”)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 as of October 31, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended October 31, 20102011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework set forth inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation under the framework set forth inInternal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of October 31, 2010.2011. Our internal control over financial reporting as of October 31, 20102011 has been audited by Ernst and Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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61
The Board of Directors and Shareholders of Calavo Growers, Inc.
We have audited Calavo Growers, Inc.’s internal control over financial reporting as of October 31, 2010,2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Calavo Growers, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Renaissance Food Group, LLC, which is included in the fiscal year 2011 consolidated financial statements of Calavo Growers, Inc. and constituted $38.1 million and $24.0 million of total and net assets, respectively, as of October 31, 2011 and $56.7 million and $1.2 million of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Calavo Growers, Inc. also did not include an evaluation of the internal control over financial reporting of Renaissance Food Group, LLC.
In our opinion, Calavo Growers, Inc. maintained, in all material respects, effective internal control over financial reporting as of October 31, 2010,2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Calavo Growers, Inc. as of October 31, 20102011 and 20092010 and the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended October 31, 20102011 of Calavo Growers Inc., and our report dated January 13, 201117, 2012 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP | ||||
Los Angeles, California
January 13, 2011
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Item 9B. Other Information
None.
PART III
Certain information required by Part III is omitted from this Annual Report because we will file a definitive Proxy Statement for the Annual Meeting of Shareholders pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the “Proxy Statement”)Proxy Statement), not later than 120 days after the end of the fiscal year covered by this Annual Report, and the applicable information included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers, and Corporate Governance
The names of our executive officers and their ages, titles and biographies are incorporated by reference from Part I, above.
The following information is included in our Notice of Annual Meeting of Shareholders and Proxy Statement to be filed within 120 days after our fiscal year end of October 31, 20102011 (the “Proxy Statement”)Proxy Statement) and is incorporated herein by reference:
Information regarding our directors who are standing for reelection and any persons nominated to become our directors is set forth under “Election of Directors.”
Information regarding our Audit Committee and designated “audit committee financial expert” is set forth under “Corporate Governance Principles and Board Matters—Board Structure and Committee Composition—Audit Committee.”
Information on our code of ethics for directors, officers and employees and our Corporate Governance Guidelines is set forth under “Corporate Governance Principles and Board Matters.”
Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the sections entitled “Executive Compensation” and “Directors’ Compensation” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the section entitled “Certain Relationships and Related Transactions” in the Proxy Statement.
Item 14. Principal Accountant’s Fees and Services
Information required by this Item is incorporated herein by reference to the section of the Proxy Statement entitled “Principal Accountant Fees and Services.”
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Item 15. Exhibits and Financial Statement Schedules
| (a) (1) | Financial Statements | |
| The following consolidated financial statements as of October 31, | ||
| Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, | ||
| (2) | Supplemental Schedules | ||
| Schedule II — Valuation and Qualifying Accounts | |||
| All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the required information is included in the consolidated financial statements or notes thereto. | |||
| (3) | Exhibits | ||
Exhibit Number | Description | |
| 2.1 | ||
| Agreement and Plan of Merger and Reorganization dated as of February 20, 2001 between Calavo Growers, Inc. and Calavo Growers of California.1 | ||
| 2.2 | ||
| Agreement and Plan of Merger dated as of November 7, 2003 Among Calavo Growers, Inc., Calavo Acquisition, Inc., Maui Fresh International, Inc. and Arthur J. Bruno, Robert J. Bruno and Javier J. Badillo2 | ||
| 2.3 | ||
| Stock Purchase Agreement dated as of June 1, 2005, between Limoneira Company and Calavo Growers, Inc.3 | ||
| 2.4 | ||
| Acquisition Agreement between Calavo Growers, Inc., a California corporation and Lecil E. Cole, Eric Weinert, Suzanne Cole-Savard, Guy Cole, and Lecil E. Cole and Mary Jeanette Cole, acting jointly and severally as trustees of the Lecil E. and Mary Jeanette Cole Revocable Trust dated October 19, 1993, also known as the Lecil E. and Mary Jeanette Cole Revocable 1993 Trust dated May 19, 20084 | ||
| 2.5 | ||
| Acquisition Agreement between Calavo Growers, Inc., Calavo Salsa Lisa, LLC, Lisa’s Salsa Company and Elizabeth Nicholson and Eric Nicholson dated February 8, 20105 | ||
| 2.6 | Amended and Restated Limited Liability Company Agreement for Calavo Salsa Lisa, LLC dated February 8, 2010 among Calavo Growers, Inc., Calavo Salsa Lisa LLC, Lisa’s Salsa Company, Elizabeth Nicholson and Eric Nicholson. (Portions of this agreement have been deleted and filed separately with the Securities and Exchange Commission Pursuant to a request for confidential treatment.) 16 | |
| 2.7 | Agreement and Plan of Merger dated May 25, 2011 among Calavo Growers, Inc., CG Mergersub LLC, Renaissance Food Group, LLC and Liberty Fresh Foods, LLC, Kenneth Catchot, Cut Fruit, LLC, James Catchot, James Gibson, Jose O. Castillo, Donald L. Johnson and RFG Nominee Trust1 (Certain portions of the exhibit have been omitted based upon a request for confidential treatment filed by the Registrant with the Securities and Exchange Commission. The omitted portions of the exhibit have been separately filed by the Registrant with the Securities and Exchange Commission.) 20 | |
| 3.1 | Articles of Incorporation of Calavo Growers, Inc. 1 | |
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| 3.2 | ||
| Amended and Restated Bylaws of Calavo Growers, Inc.6 | ||
| 3.3 | Amendments to Articles of Incorporation or Bylaws of Calavo Growers, Inc. 19 | |
| 10.1 | Form of Marketing Agreement for Calavo Growers, Inc.7 | |
| 10.2 | ||
| Marketing Agreement dated as of April 1, 1996 between Tropical Hawaiian Products, Inc., a Hawaiian corporation, and Calavo Growers of California. 1 | ||
| 10.3 | ||
| Lease Agreement dated as of November 21, 1997, between Tede S.A. de C.V., a Mexican corporation, and Calavo de Mexico, S.A. de C.V., a Mexican corporation, including attached Guaranty of Calavo Growers of California dated December 16, 1996.1 | ||
| 10.4 | ||
| Lease agreement dated as of February 15, 2005, between Limoneira Company and Calavo Growers, Inc.3 | ||
| 10.5 | ||
| Standstill agreement dated June 1, 2005, between Limoneira Company and Calavo Growers, Inc.3 | ||
| 10.6 | ||
| Standstill agreement dated June 1, 2005 between Calavo Growers, Inc. And Limoneira Company3 | ||
| 10.7 | ||
| Term Loan Agreement dated April 9, 2008 (effective date May 1, 2008) between Farm Credit West, PCA, and Calavo Growers, Inc. 8 | ||
| 10.8 | ||
| 2005 Stock Incentive Plan Of Calavo Growers, Inc.9 | ||
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| 10.9 | |||
| Calavo Supplemental Executive Retirement Agreement dated March 11, 1989 between Egidio Carbone, Jr. and Calavo Growers of California. 1 | |||
| 10.10 | Amendment to the Calavo Growers of California Supplemental Executive Retirement Agreement dated November 9, 1993 Between Egidio Carbone, Jr. and Calavo Growers of California. 1 | ||
| 10.11 | 2001 Stock Option Plan for Directors.10 | ||
| 10.12 | 2001 Stock Purchase Plan for Officers and Employees.10 | ||
| 10.13 | Business Loan Agreement between Bank of America, N.A. and Calavo Growers, Inc., dated October 15, 200711 | ||
| 10.14 | First Amendment Agreement between Bank of America, N.A. and Calavo Growers, Inc., dated August 28, 200812 | ||
| 10.15 | Form of Stock Option Agreement13 | ||
| 10.16 | Amendment No. 2 to Loan Agreement dated as of July 31, 2009 between Calavo Growers, Inc. and Bank of America, N.A.14 | ||
| 10.17 | Amendment to Term Loan Agreement between Farm Credit West, PCA, and Calavo Growers, Inc15 | ||
| 10.18 | Amendment No. 3 to Loan Agreement dated February 9, 2010 between Bank of America, N.A. and Calavo Growers, Inc. 16 | ||
| 10.19 | 2011 Management Incentive Plan of Calavo Growers, Inc. | ||
| 10.20 | Retention Bonus Agreement between Lecil E. Cole and Calavo Growers, Inc. 18 | ||
| 10.21 | Term Revolving Credit Agreement between Farm Credit West, PCA and Calavo Growers, Inc. as of May 31, 2011. 21 | ||
| 10.22 | Term Loan Agreement between Farm Credit West, PCA and Calavo Growers, Inc. as of May 31, 2011. 21 | ||
| 10.23 | Amendment to Term Revolving Credit Agreement between FCW and Calavo Growers, Inc. dated May 31, 2011. 22 | ||
| 10.24 | Amendment No. 4 to Loan Agreement dated as of September 30, 2011 between Calavo Growers, Inc. and Bank of America, N.A. 23 | ||
| 10.25 | Amendment No. 2 to Term Revolving Credit Agreement dated October 31, 2011 between Farm Credit West, PCA and Calavo Growers, Inc. 24 | ||
| 10.26 | Amendment No. 2 to Term Loan Agreement dated October 31, 2011 between Farm Credit West, PCA and Calavo Growers, Inc. 24 | ||
| 10.27 | Amendment No. 2 to Promissory Note dated October 31, 2011 between Farm Credit West, PCA and Calavo Growers, Inc. 24 | ||
| 21.1 | Subsidiaries of Calavo Growers, Inc. 1 | ||
| 23.1 | |||
| Consent of Ernst & Young LLP. * | |||
| 31.1 | |||
| Certification of Chief Executive Officer Pursuant to Rule 13a-15(e) or Rule 15d-15(e) * | |||
| 31.2 | |||
| Certification of Chief Financial Officer Pursuant to Rule 13a-15(e) or Rule 15d-15(e) * | |||
| 32 | |||
| Certification of Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350* | |||
| The following financial information from the Annual Report on Form 10-K of Calavo Growers, Inc. for the year ended October 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Balance Sheets as of October 31, 2011, and 2010; (2) Consolidated Statements of Income for the years ended October 31, 2011, 2010 and 2009; (3) Consolidated Statements of Comprehensive Income for the years ended October 31, 2011, 2010, and 2009; (4) Consolidated Statements of Shareholders’ Equity for the years ended October 31, 2011, 2010, and 2009; (5) Consolidated Statements of Cash Flows for the years ended October 31, 2011, 2010 and 2009; and (6) Notes to Financial Statements.** | |||
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| * | Filed with this Annual Report on Form 10-K. |
| ** | Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101(a) is “furnished” and is not deemed to be “filed” or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, (b) is deemed not to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and (c) is not otherwise subject to liability under those sections. |
| 1 | Previously filed on April 24, 2001 as an exhibit to the Registrant’s Registration Statement on Form S-4, File No. 333-59418, and incorporated herein by reference. | |
| 2 | Previously filed on January 23, 2004 as an exhibit to the Registrant’s Report on Form 10-K and incorporated herein by reference. | |
| 3 | Previously filed on June 9, 2005 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. | |
| 4 | Previously filed on May 29, 2008 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 5 | Previously filed on February 8, 2010 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 6 | Previously filed on December 19, 2002 as an exhibit to the Registrant’s Report on Form 8-K, and incorporated herein by reference. | |
| 7 | Previously filed on January 28, 2003 as an exhibit to the Registrant’s Report on Form 10-K and incorporated herein by reference. | |
| 8 | Previously filed on May 8, 2008 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 9 | Previously filed on March 21, 2005 as an exhibit to the Registrant’s Definitive Proxy Statement on Form DEF14A and incorporated herein by reference. | |
| 10 | Previously filed on December 18, 2001 as an exhibit to the Registrant’s Registration Statement on Form S-8, File No. 333-75378, and incorporated herein by reference. | |
| 11 | Previously filed on October 19, 2007 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 12 | Previously filed on January 27, 2009 as an exhibit to the Registrant’s Report on Form 10-K/A and incorporated herein by reference. | |
| 13 | Previously filed on September 11, 2006 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. | |
| 14 | Previously filed on August 6, 2009 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 15 | Previously filed on January 11, 2010 as an exhibit to the Registrant’s Report on Form 10-K and incorporated herein by reference. |
| 16 | Previously filed on March 11, 2010 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. |
| 17 | Previously filed on January 14, 2011 as an exhibit to the Registrant’s Report on Form 10-K and incorporated herein by reference. |
| 18 | Previously filed on March 2, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| 19 | Previously filed on March 30, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| 20 | Previously filed on January 10, 2012 as an exhibit to the Registrant’s Report on Form 8-K/A and incorporated herein by reference. |
| 21 | Previously filed on June 15, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| 22 | Previously filed on September 9, 2011 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. |
| 23 | Previously filed on October 6, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| 24 | Previously filed on November 14, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
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(b) | Exhibits |
| See subsection (a) (3) above. | ||
(c) | Financial Statement Schedules | |
| See subsection (a) (1) and (2) above. | ||
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SIGNATURES
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CALAVO GROWERS, INC | ||||
By: | ||||
/s/ Lecil E. Cole | ||||
| Lecil E. Cole | ||||
| Chairman of the Board of Directors, | ||||
| Chief Executive Officer and President | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on January 13, 201117, 2012 by the following persons on behalf of the registrant and in the capacities indicated:
Signature | Title | ||
/s/ Lecil E. Cole Lecil E. Cole | Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer) | ||
/s/ Arthur J. Bruno Arthur J. Bruno | Chief Operating Officer, Chief Financial Officer and Corporate Secretary (Principal Financial Officer) | ||
/s/ James E. Snyder James E. Snyder | Corporate Controller (Principal Accounting Officer) | ||
/s/ Donald M. Sanders Donald M. Sanders | Director | ||
/s/ Marc L. Brown Marc L. Brown | Director | ||
/s/ John M. Hunt John M. Hunt | Director | ||
/s/ George H. Barnes George H. Barnes | Director | ||
/s/ J. Link Leavens J. Link Leavens | Director | ||
/s/ James Helin | Director | ||
/s/ Dorcas H. McFarlane Dorcas H. McFarlane | Director | ||
/s/ Egidio Carbone, Jr Egidio Carbone, Jr | Director | ||
/s/ Steven W. Hollister Steven W. Hollister | Director | ||
/s/ Harold Edwards Harold Edwards | Director | ||
/s/ Scott Van Der Kar Scott Van Der Kar | Director | ||
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CALAVO GROWERS, INC.
VALUATION AND QUALIFYING ACCOUNTS (in thousands)
| Fiscal year | Balance at | Balance at | ||||||||||||||||||
| ended | beginning | end | ||||||||||||||||||
| October 31: | of year | Additions(1) | Deductions(2) | of year | ||||||||||||||||
| Allowance for customer deductions | 2008 | 1,329 | 7,065 | 7,163 | 1,231 | |||||||||||||||
| 2009 | 1,231 | 6,080 | 6,058 | 1,253 | ||||||||||||||||
| 2010 | 1,253 | 6,474 | 6,912 | 815 | ||||||||||||||||
| Allowance for doubtful accounts | 2008 | 942 | 93 | 53 | 982 | |||||||||||||||
| 2009 | 982 | 122 | 4 | 1,100 | ||||||||||||||||
| 2010 | 1,100 | 127 | 670 | 557 | ||||||||||||||||
| Fiscal year ended October 31: | Balance at beginning of year | Additions(1) | Deductions(2) | Balance at end of year | ||||||||||||||
Allowance for customer deductions | 2009 | 1,231 | 6,080 | 6,058 | 1,253 | |||||||||||||
| 2010 | 1,253 | 6,474 | 6,912 | 815 | ||||||||||||||
| 2011 | 815 | 8,674 | 7,693 | 1,796 | ||||||||||||||
Allowance for doubtful accounts | 2009 | 982 | 122 | 4 | 1,100 | |||||||||||||
| 2010 | 1,100 | 127 | 670 | 557 | ||||||||||||||
| 2011 | 557 | 91 | 159 | 489 | ||||||||||||||
| (1) | Charged to net sales (customer deductions) or costs and expenses (doubtful accounts). | |
| (2) | Customer deductions taken or write off of accounts receivables. |
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Exhibit Number | Description | ||
| 2.1 | |||
| Agreement and Plan of Merger and Reorganization dated as of February 20, 2001 between Calavo Growers, Inc. and Calavo Growers of California.1 | |||
| 2.2 | |||
| Agreement and Plan of Merger dated as of November 7, 2003 Among Calavo Growers, Inc., Calavo Acquisition, Inc., Maui Fresh International, Inc. and Arthur J. Bruno, Robert J. Bruno and Javier J. Badillo2 | |||
| 2.3 | |||
| Stock Purchase Agreement dated as of June 1, 2005, between Limoneira Company and Calavo Growers, Inc.3 | |||
| 2.4 | |||
| Acquisition Agreement between Calavo Growers, Inc., a California corporation and Lecil E. Cole, Eric Weinert, Suzanne Cole-Savard, Guy Cole, and Lecil E. Cole and Mary Jeanette Cole, acting jointly and severally as trustees of the Lecil E. and Mary Jeanette Cole Revocable Trust dated October 19, 1993, also known as the Lecil E. and Mary Jeanette Cole Revocable 1993 Trust dated May 19, 20084 | |||
| 2.5 | |||
| Acquisition Agreement between Calavo Growers, Inc., Calavo Salsa Lisa, LLC, Lisa’s Salsa Company and Elizabeth Nicholson and Eric Nicholson dated February 8, 20105 | |||
| 2.6 | Amended and Restated Limited Liability Company Agreement for Calavo Salsa Lisa, LLC dated February 8, 2010 among Calavo Growers, Inc., Calavo Salsa Lisa LLC, Lisa’s Salsa Company, Elizabeth Nicholson and Eric Nicholson. (Portions of this agreement have been deleted and filed separately with the Securities and Exchange Commission Pursuant to a request for confidential treatment.) 16 | ||
| 2.7 | Agreement and Plan of Merger dated May 25, 2011 among Calavo Growers, Inc., CG Mergersub LLC, Renaissance Food Group, LLC and Liberty Fresh Foods, LLC, Kenneth Catchot, Cut Fruit, LLC, James Catchot, James Gibson, Jose O. Castillo, Donald L. Johnson and RFG Nominee Trust1 (Certain portions of the exhibit have been omitted based upon a request for confidential treatment filed by the Registrant with the Securities and Exchange Commission. The omitted portions of the exhibit have been separately filed by the Registrant with the Securities and Exchange Commission.) 20 | ||
| 3.1 | Articles of Incorporation of Calavo Growers, Inc. 1 | ||
| 3.2 | |||
| Amended and Restated Bylaws of Calavo Growers, Inc.6 | |||
| 3.3 | Amendments to Articles of Incorporation or Bylaws of Calavo Growers, Inc. 19 | ||
| 10.1 | Form of Marketing Agreement for Calavo Growers, Inc.7 | ||
| 10.2 | |||
| Marketing Agreement dated as of April 1, 1996 between Tropical Hawaiian Products, Inc., a Hawaiian corporation, and Calavo Growers of California. 1 | |||
| 10.3 | |||
| Lease Agreement dated as of November 21, 1997, between Tede S.A. de C.V., a Mexican corporation, and Calavo de Mexico, S.A. de C.V., a Mexican corporation, including attached Guaranty of Calavo Growers of California dated December 16, 1996.1 | |||
| 10.4 | |||
| Lease agreement dated as of February 15, 2005, between Limoneira Company and Calavo Growers, Inc.3 | |||
| 10.5 | |||
| Standstill agreement dated June 1, 2005, between Limoneira Company and Calavo Growers, Inc.3 | |||
| 10.6 | |||
| Standstill agreement dated June 1, 2005 between Calavo Growers, Inc. And Limoneira Company3 | |||
| 10.7 | |||
| Term Loan Agreement dated April 9, 2008 (effective date May 1, 2008) between Farm Credit West, PCA, and Calavo Growers, Inc. 8 | |||
| 10.8 | |||
| 2005 Stock Incentive Plan Of Calavo Growers, Inc.9 | |||
| 10.9 | |||
| Calavo Supplemental Executive Retirement Agreement dated March 11, 1989 between Egidio Carbone, Jr. and Calavo Growers of California. 1 | |||
| 10.10 | Amendment to the Calavo Growers of California Supplemental Executive Retirement Agreement dated November 9, 1993 Between Egidio Carbone, Jr. and Calavo Growers of California.1 | ||
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| 10.11 | 2001 Stock Option Plan for Directors.10 | ||
| 10.12 | 2001 Stock Purchase Plan for Officers and Employees.10 | ||
| 10.13 | Business Loan Agreement between Bank of America, N.A. and Calavo Growers, Inc., dated October 15, 200711 | ||
| 10.14 | First Amendment Agreement between Bank of America, N.A. and Calavo Growers, Inc., dated August 28, 200812 | ||
| 10.15 | Form of Stock Option Agreement13 | ||
| 10.16 | Amendment No. 2 to Loan Agreement dated as of July 31, 2009 between Calavo Growers, Inc. and Bank of America, N.A.14 | ||
| 10.17 | Amendment to Term Loan Agreement between Farm Credit West, PCA, and Calavo Growers, Inc15 | ||
| 10.18 | Amendment No. 3 to Loan Agreement dated February 9, 2010 between Bank of America, N.A. and Calavo Growers, Inc. 16 | ||
| 10.19 | 2011 Management Incentive Plan of Calavo Growers, Inc. | ||
| 10.20 | Retention Bonus Agreement between Lecil E. Cole and Calavo Growers, Inc. 18 | ||
| 10.21 | Term Revolving Credit Agreement between Farm Credit West, PCA and Calavo Growers, Inc. as of May 31, 2011. 21 | ||
| 10.22 | Term Loan Agreement between Farm Credit West, PCA and Calavo Growers, Inc. as of May 31, 2011. 21 | ||
| 10.23 | Amendment to Term Revolving Credit Agreement between FCW and Calavo Growers, Inc. dated May 31, 2011. 22 | ||
| 10.24 | Amendment No. 4 to Loan Agreement dated as of September 30, 2011 between Calavo Growers, Inc. and Bank of America, N.A. 23 | ||
| 10.25 | Amendment No. 2 to Term Revolving Credit Agreement dated October 31, 2011 between Farm Credit West, PCA and Calavo Growers, Inc. 24 | ||
| 10.26 | Amendment No. 2 to Term Loan Agreement dated October 31, 2011 between Farm Credit West, PCA and Calavo Growers, Inc. 24 | ||
| 10.27 | Amendment No. 2 to Promissory Note dated October 31, 2011 between Farm Credit West, PCA and Calavo Growers, Inc. 24 | ||
| 21.1 | Subsidiaries of Calavo Growers, Inc. 1 | ||
| 23.1 | |||
| Consent of Ernst & Young LLP. * | |||
| 31.1 | |||
| Certification of Chief Executive Officer Pursuant to Rule 13a-15(e) or Rule 15d-15(e) * | |||
| 31.2 | |||
| Certification of Chief Financial Officer Pursuant to Rule 13a-15(e) or Rule 15d-15(e) * | |||
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| 32 | ||
| Certification of Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350* | ||
| The following financial information from the Annual Report on Form 10-K of Calavo Growers, Inc. for the year ended October 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Balance Sheets as of October 31, 2011, and 2010; (2) Consolidated Statements of Income for the years ended October 31, 2011, 2010 and 2009; (3) Consolidated Statements of Comprehensive Income for the years ended October 31, 2011, 2010, and 2009; (4) Consolidated Statements of Shareholders’ Equity for the years ended October 31, 2011, 2010, and 2009; (5) Consolidated Statements of Cash Flows for the years ended October 31, 2011, 2010 and 2009; and (6) Notes to Financial Statements.** | |||
| * | Filed with this Annual Report on Form 10-K. |
| ** | Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101(a) is “furnished” and is not deemed to be “filed” or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, (b) is deemed not to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and (c) is not otherwise subject to liability under those sections. |
| 1 | Previously filed on April 24, 2001 as an exhibit to the Registrant’s Registration Statement on Form S-4, File No. 333-59418, and incorporated herein by reference. | |
| 2 | Previously filed on January 23, 2004 as an exhibit to the Registrant’s Report on Form 10-K and incorporated herein by reference. | |
| 3 | Previously filed on June 9, 2005 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. | |
| 4 | Previously filed on May 29, 2008 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 5 | Previously filed on February 8, 2010 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 6 | Previously filed on December 19, 2002 as an exhibit to the Registrant’s Report on Form 8-K, and incorporated herein by reference. | |
| 7 | Previously filed on January 28, 2003 as an exhibit to the Registrant’s Report on Form 10-K and incorporated herein by reference. | |
| 8 | Previously filed on May 8, 2008 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 9 | Previously filed on March 21, 2005 as an exhibit to the Registrant’s Definitive Proxy Statement on Form DEF14A and incorporated herein by reference. | |
| 10 | Previously filed on December 18, 2001 as an exhibit to the Registrant’s Registration Statement on Form S-8, File No. 333-75378, and incorporated herein by reference. | |
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| 11 | Previously filed on October 19, 2007 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 12 | Previously filed on January 27, 2009 as an exhibit to the Registrant’s Report on Form 10-K/A and incorporated herein by reference. | |
| 13 | Previously filed on September 11, 2006 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. | |
| 14 | Previously filed on August 6, 2009 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. | |
| 15 | Previously filed on January 11, 2010 as an exhibit to the Registrant’s Report on Form 10-K and incorporated herein by reference. |
| 16 | Previously filed on March 11, 2010 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. |
| 17 | Previously filed on January 14, 2011 as an exhibit to the Registrant’s Report on Form 10-K and incorporated herein by reference. |
| 18 | Previously filed on March 2, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| 19 | Previously filed on March 30, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| 20 | Previously filed on January 10, 2012 as an exhibit to the Registrant’s Report on Form 8-K/A and incorporated herein by reference. |
| 21 | Previously filed on June 15, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| 22 | Previously filed on September 9, 2011 as an exhibit to the Registrant’s Report on Form 10-Q and incorporated herein by reference. |
| 23 | Previously filed on October 6, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
| 24 | Previously filed on November 14, 2011 as an exhibit to the Registrant’s Report on Form 8-K and incorporated herein by reference. |
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