UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
|
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the quarterly period ended JanuaryJuly 31, 20182021
ORor
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) For the transition period from ______________________ to ______________________ |
Commission file number: 000-33385
CALAVO GROWERS, INC.
(Exact name of registrant as specified in its charter)
| |
California | 33-0945304 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1141-A Cummings Road, Santa Paula, California | 93060 | |
(Address of principal executive offices) | (Zip Code) |
1141-A Cummings Road
Santa Paula, California 93060
(Address of principal executive offices) (Zip code)
(805) 805) 525-1245
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | CVGW | Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒No ☐Yes ☒ No ☐
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). Yes ☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”filer”, “accelerated filer”, “smaller reporting company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
| |||
Non-accelerated filer ☐ | Smaller | ||
Emerging growth company ☐ |
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒
Registrant's number of shares of common stock outstanding as of JanuaryJuly 31, 20182021 was 17,543,42817,683,309
FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks, uncertaintiesrelating to future events and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo Growers, Inc. and its consolidated subsidiaries (Calavo, the Company, we, us or our), including certain projections and business trends, that are "forward-looking statements," as defined in the Private Securities Litigation and Reform Act of 1995, that involve risks, uncertainties and assumptions. These statements are based on our current expectations and are not promises or guarantees. If any of the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, gross profit, expenses, gain/(loss) on Limoneira shares, income/(loss) from unconsolidated entities, earnings, earnings per share, tax provisions, cash flows and currency exchange rates,rates; the impact of COVID-19 on our business, results of operations and financial condition; the impact of acquisitions or debt or equity investments or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of restructuring and integration (including information technology systems integration) plans; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Calavo and its financial performance;performance, whether attributable to Calavo or any of its unconsolidated entities; any statements regarding pending investigations, legal claims or tax disputes; any statements of expectation or belief; any risks associated with doing business internationally (including possible restrictive U.S. and foreign governmental actions, such as restrictions on transfers of funds and COVID-19 and trade protection measures such as import/export/customs duties, tariffs and/or quotas); any risks associated with receivables from and/or equity investments in unconsolidated entities; system security risk and cyber-attacks and any statements of assumptions underlying any of the foregoing.
Risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by the forward-looking statements include, but are not limited to, the following: the impact of the COVID-19 pandemic on our business, results of operations, and assumptions includefinancial condition, including, but not limited to, disruptions in the manufacturing of our products and the operations of the related supply chains supporting our ability to deliver our products to consumers, impacts on our employees and uncertainty regarding our ability to implement health and safety measures for our employees, uncertainties regarding consumer demand for our products, impact on our food service customers, increased costs, the impact of governmental trade restrictions imposed as a result of COVID-19 and the possible adverse impact of COVID-19 on our goodwill and other intangible assets; our ability to raise prices, particularly in our RFG and Foods segments, to offset increased costs of goods sold, and the impact of such price increases on future net sales; seasonality of our business; sensitivity of our business to changes in market prices of avocados and other agricultural products and other raw materials including fuel, packaging and paper; potential disruptions to our supply chain; risks associated with potential future acquisitions, including integration; potential exposure to data breaches and other cyber-attacks on our systems or those of our suppliers or customers; dependence on large customers; dependence on key personnel and the ability of our management team to work together successfully; potential for labor disputes; reliance on co-packers for a portion of our production needs; competitive pressures, including from foreign growers; risks of recalls and food-related injuries to our customers; changing consumer preferences; the impact of environmental regulations, including those related to climate change; our ability to develop and transition new products and services and enhance existing products and services to meet customer needs; risks associated with doing business internationally (including possible restrictive U.S. and foreign governmental actions, such as restrictions on transfers of funds and COVID-19 and trade protection measures such as import/export/customs duties, tariffs and/or quotas and currency fluctuations); risks associated with receivables from, loans to and/or equity investments in unconsolidated entities, including FreshRealm; volatility in the value of our common stock; the impact of macroeconomic trends and events; the competitive pressures faced by Calavo's businesses; the development and transition of new products and services (and the enhancement of existing products and services) to meet customer needs; integration and other risks associated with business combinations; the hiring and retention of key employees; the resolution of pending investigations, legal claims and tax disputes;disputes, including an assessment imposed by the Servicio de Administracion Tributaria in Mexico (the “SAT”) and our defenses against collection activities commenced by the SAT.
For a further discussion of these risks and uncertainties and other risks and uncertainties that arewe face, please see the risk factors described herein, including, but not limited to, the items discussed in Item 1A, Risk Factors, in our most recent Annual Report on Form 10-K for the fiscal year ended October 31, 2017,2020 filed with the Securities and those detailed from time to timeExchange Commission and any subsequent updates that may be contained in our Quarterly Reports on Form 10-Q (including this Quarterly Report on Form 10-Q) and other filings with the Securities and Exchange Commission. Calavo assumesForward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation and does not intend to update theseor revise the forward-looking statements,. whether as a result of new information, future events or otherwise.
2
CALAVO GROWERS, INC.
INDEX
| | PAGE | |
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| | | |
| Consolidated Condensed Balance Sheets – | 4 | |
| | | |
| 5 | ||
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| | ||
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6 | |||
| | | |
| 7 | ||
| | | |
| 8 | ||
| | | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 22 | ||
| | | |
35 | |||
| | | |
36 | |||
| | | |
| | | |
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| | | |
36 | |||
| | | |
36 | |||
| | | |
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38 | |||
| | | |
38 | |||
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| 39 |
3
PART I. FINANCIAL INFORMATION
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share amounts)
| | | | | | | |
| | July 31, | | October 31, | | ||
| | 2021 | | 2020 | | ||
| | | | | | | |
Assets |
| |
|
| |
| |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 368 | | $ | 4,055 | |
Restricted cash | | | 970 | | | — | |
Accounts receivable, net of allowances of $6,860 (2021) and $3,498 (2020) | |
| 79,979 | |
| 63,668 | |
Inventories | |
| 47,443 | |
| 41,787 | |
Prepaid expenses and other current assets | |
| 14,227 | |
| 10,733 | |
Advances to suppliers | |
| 8,703 | |
| 5,061 | |
Income taxes receivable | |
| 6,577 | |
| 10,591 | |
Total current assets | |
| 158,267 | |
| 135,895 | |
Property, plant, and equipment, net | |
| 129,080 | |
| 130,270 | |
Operating lease right-of-use assets | |
| 57,036 | |
| 60,262 | |
Investment in Limoneira Company | |
| 30,040 | |
| 23,197 | |
Investments in unconsolidated entities | |
| 4,309 | |
| 6,065 | |
Deferred income taxes | |
| 2,790 | |
| 2,486 | |
Goodwill | |
| 28,653 | |
| 28,568 | |
Intangibles, net | | | 9,137 | | | 10,323 | |
Other assets | |
| 40,006 | |
| 32,558 | |
| | $ | 459,318 | | $ | 429,624 | |
Liabilities and shareholders' equity | | | | | | | |
Current liabilities: | | | | | | | |
Payable to growers | | $ | 30,040 | | $ | 11,346 | |
Trade accounts payable | |
| 10,424 | |
| 9,384 | |
Accrued expenses | |
| 40,713 | |
| 36,922 | |
Borrowings pursuant to credit facilities, current | |
| — | |
| 20,550 | |
Dividend payable | |
| — | |
| 20,343 | |
Other current liabilities | | | 11,000 | | | — | |
Current portion of operating leases | |
| 7,051 | |
| 6,443 | |
Current portion of long-term obligations and finance leases | |
| 1,486 | |
| 1,343 | |
Total current liabilities | |
| 100,714 | |
| 106,331 | |
Long-term liabilities: | | | | | | | |
Borrowings pursuant to credit facilities, long-term | | | 36,000 | | | — | |
Long-term operating leases, less current portion | |
| 54,447 | |
| 58,273 | |
Long-term obligations and finance leases, less current portion | |
| 5,688 | |
| 5,716 | |
Other long-term liabilities | |
| 3,136 | |
| 3,302 | |
Total long-term liabilities | |
| 99,271 | |
| 67,291 | |
Commitments and contingencies | | | | | | | |
Shareholders' equity: | | | | | | | |
Common stock ($0.001 par value, 100,000 shares authorized; 17,683 (2021) and 17,661 (2020) shares issued and outstanding) | |
| 18 | |
| 18 | |
Additional paid-in capital | |
| 167,215 | |
| 165,000 | |
Noncontrolling interest | |
| 1,451 | |
| 1,472 | |
Retained earnings | |
| 90,649 | |
| 89,512 | |
Total shareholders' equity | |
| 259,333 | |
| 256,002 | |
| | $ | 459,318 | | $ | 429,624 | |
|
|
|
|
|
|
|
|
|
| January 31, |
| October 31, |
| ||
|
| 2018 |
| 2017 |
| ||
|
|
|
|
|
|
| |
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 2,942 |
| $ | 6,625 |
|
Accounts receivable, net of allowances of $3,638 (2018) $2,490 (2017) |
|
| 72,655 |
|
| 69,750 |
|
Inventories, net |
|
| 31,184 |
|
| 30,858 |
|
Prepaid expenses and other current assets |
|
| 7,680 |
|
| 6,872 |
|
Advances to suppliers |
|
| 1,892 |
|
| 4,346 |
|
Income taxes receivable |
|
| — |
|
| 1,377 |
|
Total current assets |
|
| 116,353 |
|
| 119,828 |
|
Property, plant, and equipment, net |
|
| 121,766 |
|
| 120,072 |
|
Investment in Limoneira Company |
|
| 37,251 |
|
| 40,362 |
|
Investment in unconsolidated entities |
|
| 33,622 |
|
| 33,019 |
|
Deferred income taxes |
|
| 9,419 |
|
| 9,783 |
|
Goodwill |
|
| 18,262 |
|
| 18,262 |
|
Other assets |
|
| 23,975 |
|
| 22,791 |
|
|
| $ | 360,648 |
| $ | 364,117 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Payable to growers |
| $ | 17,304 |
| $ | 16,524 |
|
Trade accounts payable |
|
| 20,676 |
|
| 22,911 |
|
Accrued expenses |
|
| 35,575 |
|
| 39,946 |
|
Income taxes payable |
|
| 1,368 |
|
| — |
|
Short-term borrowings |
|
| 31,500 |
|
| 20,000 |
|
Dividend payable |
|
| — |
|
| 16,657 |
|
Current portion of long-term obligations |
|
| 123 |
|
| 129 |
|
Total current liabilities |
|
| 106,546 |
|
| 116,167 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
Long-term obligations, less current portion |
|
| 409 |
|
| 439 |
|
Deferred rent |
|
| 2,719 |
|
| 2,732 |
|
Other long-term liabilities |
|
| — |
|
| 657 |
|
Total long-term liabilities |
|
| 3,128 |
|
| 3,828 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
Shareholders' equity: |
|
|
|
|
|
|
|
Common stock ($0.001 par value, 100,000 shares authorized; 17,543 (2018) and 17,533 (2017) shares issued and outstanding) |
|
| 18 |
|
| 18 |
|
Additional paid-in capital |
|
| 155,127 |
|
| 154,243 |
|
Accumulated other comprehensive income |
|
| 8,412 |
|
| 10,434 |
|
Noncontrolling interest |
|
| 1,867 |
|
| 1,016 |
|
Retained earnings |
|
| 85,550 |
|
| 78,411 |
|
Total shareholders' equity |
|
| 250,974 |
|
| 244,122 |
|
|
| $ | 360,648 |
| $ | 364,117 |
|
The accompanying notes are an integral part of these consolidated condensed financialstatements.
4
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOMEOPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
| January 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
|
|
|
|
|
|
| |
Net sales |
| $ | 247,928 |
| $ | 226,554 |
|
Cost of sales |
|
| 221,618 |
|
| 204,630 |
|
Gross profit |
|
| 26,310 |
|
| 21,924 |
|
Selling, general and administrative |
|
| 15,517 |
|
| 13,826 |
|
Operating income |
|
| 10,793 |
|
| 8,098 |
|
Interest expense |
|
| (231) |
|
| (247) |
|
Other income (expense), net |
|
| 729 |
|
| (69) |
|
Income before provision for income taxes |
|
| 11,291 |
|
| 7,782 |
|
Provision for income taxes |
|
| 4,302 |
|
| 2,561 |
|
Net income |
|
| 6,989 |
|
| 5,221 |
|
Less: Net loss attributable to noncontrolling interest |
|
| 150 |
|
| 28 |
|
Net income attributable to Calavo Growers, Inc. |
| $ | 7,139 |
| $ | 5,249 |
|
|
|
|
|
|
|
|
|
Calavo Growers, Inc.’s net income per share: |
|
|
|
|
|
|
|
Basic |
| $ | 0.41 |
| $ | 0.30 |
|
Diluted |
| $ | 0.41 |
| $ | 0.30 |
|
|
|
|
|
|
|
|
|
Number of shares used in per share computation: |
|
|
|
|
|
|
|
Basic |
|
| 17,446 |
|
| 17,374 |
|
Diluted |
|
| 17,525 |
|
| 17,430 |
|
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | ||||||||
| | July 31, | | July 31, | | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | ||||
| | | | | | | | | | | | ||
Net sales |
| $ | 285,008 |
| $ | 270,425 |
| $ | 782,407 |
| $ | 824,941 | |
Cost of sales | |
| 277,141 | |
| 239,590 | |
| 734,101 | |
| 756,223 | |
Gross profit | |
| 7,867 | |
| 30,835 | |
| 48,306 | |
| 68,718 | |
Selling, general and administrative | |
| 12,387 | |
| 13,424 | |
| 40,374 | |
| 44,226 | |
Expenses related to Mexican tax matters | | | 1,342 | | | — | | | 1,342 | | | — | |
Gain on sale of Temecula packinghouse | |
| (54) | |
| (54) | |
| (162) | |
| (162) | |
Operating income (loss) | |
| (5,808) | | | 17,465 | |
| 6,752 | |
| 24,654 | |
Interest expense | |
| (208) | |
| (203) | |
| (573) | |
| (732) | |
Other income, net | |
| 180 | |
| 628 | |
| 792 | |
| 2,250 | |
Recovery (Loss) on reserve for FreshRealm note receivable and impairment of investment | | | 6,000 | | | (37,192) | | | 6,130 | | | (37,192) | |
Unrealized net gain (loss) on Limoneira shares | |
| (252) | |
| 218 | |
| 6,843 | |
| (9,125) | |
Income (loss) before income taxes and loss from unconsolidated entities | |
| (88) | |
| (19,084) | |
| 19,944 | |
| (20,145) | |
Income tax (provision) benefit | |
| (12,358) | |
| 4,682 | |
| (17,073) | |
| 6,540 | |
Net loss from unconsolidated entities | |
| (469) | |
| (1,170) | |
| (1,755) | |
| (6,375) | |
Net income (loss) | |
| (12,915) | |
| (15,572) | |
| 1,116 | |
| (19,980) | |
Add: Net loss (income) attributable to noncontrolling interest | |
| (66) | |
| (64) | |
| 21 | |
| 128 | |
Net Income (loss) attributable to Calavo Growers, Inc. | | $ | (12,981) | | $ | (15,636) | | $ | 1,137 | | $ | (19,852) | |
| | | | | | | | | | | | | |
Calavo Growers, Inc.’s net income (loss) per share: | | | | | | | | | | | | | |
Basic | | $ | (0.74) | | $ | (0.89) | | $ | 0.06 | | $ | (1.13) | |
Diluted | | $ | (0.74) | | $ | (0.89) | | $ | 0.06 | | $ | (1.13) | |
| | | | | | | | | | | | | |
Number of shares used in per share computation: | | | | | | | | | | | | | |
Basic | |
| 17,630 | |
| 17,586 | |
| 17,616 | |
| 17,558 | |
Diluted | |
| 17,630 | |
| 17,586 | |
| 17,669 | |
| 17,558 | |
The accompanying notes are an integral part of these consolidated condensed financialstatements.
5
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
| January 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
Net income |
| $ | 6,989 |
| $ | 5,221 |
|
Other comprehensive income, before tax: |
|
|
|
|
|
|
|
Unrealized investment losses |
|
| (3,111) |
|
| (4,650) |
|
Income tax benefit related to items of other comprehensive income |
|
| 1,089 |
|
| 1,697 |
|
Other comprehensive loss, net of tax |
|
| (2,022) |
|
| (2,953) |
|
Comprehensive income |
|
| 4,967 |
|
| 2,268 |
|
Less: Net loss attributable to noncontrolling interest |
|
| 150 |
|
| 28 |
|
Comprehensive income – Calavo Growers, Inc. |
| $ | 5,117 |
| $ | 2,296 |
|
| | | | | | | |
| | Nine months ended July 31, | | ||||
| | 2021 | | 2020 | | ||
| | | | | | | |
Cash Flows from Operating Activities: |
| |
|
| |
| |
Net income (loss) | | $ | 1,116 | | $ | (19,980) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| 12,925 | |
| 11,850 | |
Non-cash operating lease expense | | | 57 | | | 145 | |
Net loss from unconsolidated entities | |
| 1,755 | |
| 6,375 | |
Unrealized net loss (gain) on Limoneira shares | |
| (6,843) | |
| 9,125 | |
Loss (recovery) on reserve for FreshRealm note receivable and impairment of investment | |
| (6,130) | |
| 37,192 | |
Interest income on notes to FreshRealm | |
| — | |
| (1,732) | |
Stock-based compensation expense | |
| 2,818 | |
| 3,569 | |
Gain on sale of Temecula packinghouse | |
| (162) | |
| (162) | |
Loss (gain) on disposal of property, plant, and equipment | |
| (170) | |
| 230 | |
Deferred income taxes on FreshRealm reserve and impairment loss | |
| — | |
| (7,525) | |
Effect on cash of changes in operating assets and liabilities: | | | | | | | |
Accounts receivable, net | |
| (16,137) | |
| (4,045) | |
Inventories, net | |
| (5,687) | |
| (6,363) | |
Prepaid expenses and other current assets | |
| 2,291 | |
| (814) | |
Advances to suppliers | |
| (3,642) | |
| 4,873 | |
Income taxes receivable/payable | |
| 4,014 | |
| (4,678) | |
Other assets | |
| (7,003) | |
| (9) | |
Payable to growers | |
| 18,694 | |
| 5,027 | |
Trade accounts payable, accrued expenses and other liabilities | |
| 14,500 | |
| (12,722) | |
Net cash provided by operating activities | |
| 12,396 | |
| 20,356 | |
Cash Flows from Investing Activities: | | | | | | | |
Purchases of property, plant, and equipment | |
| (9,639) | |
| (8,349) | |
Acquisition of SFFI, net of cash acquired of $623 | |
| — | |
| (18,396) | |
Loan to Agricola Belher | |
| (3,500) | |
| — | |
Recovery of proceeds from FreshRealm Separation Agreement | |
| 6,000 | |
| — | |
Investment in FreshRealm | |
| — | |
| (1,477) | |
Infrastructure advance to tomato growers | | | (1,326) | | | — | |
Net cash used in investing activities | |
| (8,465) | |
| (28,222) | |
Cash Flows from Financing Activities: | | | | | | | |
Payment of dividend to shareholders | |
| (20,343) | |
| (19,354) | |
Proceeds from revolving credit facility | |
| 266,350 | |
| 172,450 | |
Payments on revolving credit facility | |
| (250,900) | |
| (147,850) | |
Payments of minimum withholding taxes on net share settlement of equity awards | | | (650) | | | (1,179) | |
Payments on long-term obligations and finance leases | |
| (1,152) | |
| (687) | |
Proceeds from stock option exercises | |
| 47 | |
| 86 | |
Net cash provided by (used in) financing activities | |
| (6,648) | |
| 3,466 | |
Net decrease in cash, cash equivalents and restricted cash | |
| (2,717) | |
| (4,400) | |
Cash, cash equivalents and restricted cash, beginning of period | |
| 4,055 | |
| 7,973 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 1,338 | | $ | 3,573 | |
| | | | | | | |
Noncash Investing and Financing Activities: | | | | | | | |
Right of use assets obtained in exchange for new financing lease obligations | | $ | 1,222 | | $ | 593 | |
Notes receivable from FreshRealm converted to investment in FreshRealm | | $ | — | | $ | 2,761 | |
Property, plant, and equipment included in trade accounts payable and accrued expenses | | $ | 375 | | $ | 568 | |
Collection for Agricola Belher Infrastructure Advance | | $ | — | | $ | 800 | |
The accompanying notes are an integral part of these consolidated condensed financialstatements.
6
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
| Three months ended January 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
|
|
|
|
|
|
| |
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
Net income |
| $ | 6,989 |
| $ | 5,221 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 3,211 |
|
| 2,293 |
|
Loss (income) from unconsolidated entities |
|
| (603) |
|
| 166 |
|
Stock compensation expense |
|
| 1,832 |
|
| 1,827 |
|
Deferred income taxes |
|
| 1,453 |
|
| — |
|
Effect on cash of changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable, net |
|
| (2,905) |
|
| (6,277) |
|
Inventories, net |
|
| (326) |
|
| 7,440 |
|
Prepaid expenses and other current assets |
|
| (920) |
|
| 370 |
|
Advances to suppliers |
|
| 2,454 |
|
| (1,750) |
|
Income taxes receivable/payable |
|
| 2,745 |
|
| (2,341) |
|
Other assets |
|
| (1,465) |
|
| 388 |
|
Payable to growers |
|
| 780 |
|
| (4,480) |
|
Deferred rent |
|
| (13) |
|
| (9) |
|
Trade accounts payable, accrued expenses and other long-term liabilities |
|
| (5,335) |
|
| (1,159) |
|
Net cash provided by operating activities |
|
| 7,897 |
|
| 1,689 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
Acquisitions of and deposits on property, plant, and equipment |
|
| (5,394) |
|
| (31,223) |
|
Proceeds received for repayment of San Rafael note |
|
| 112 |
|
| 108 |
|
Investment in FreshRealm |
|
| — |
|
| (1,600) |
|
Net cash used in investing activities |
|
| (5,282) |
|
| (32,715) |
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
Payment of dividend to shareholders |
|
| (16,657) |
|
| (15,696) |
|
Proceeds from revolving credit facility |
|
| 58,000 |
|
| 64,500 |
|
Payments on revolving credit facility |
|
| (46,500) |
|
| (24,000) |
|
Payment of minimum withholding taxes on net share settlement of equity awards |
|
| (1,158) |
|
| — |
|
Payments on long-term obligations |
|
| (36) |
|
| (34) |
|
Proceeds from stock option exercises |
|
| 53 |
|
| — |
|
Net cash provided by (used in) financing activities |
|
| (6,298) |
|
| 24,770 |
|
Net decrease in cash and cash equivalents |
|
| (3,683) |
|
| (6,256) |
|
Cash and cash equivalents, beginning of period |
|
| 6,625 |
|
| 13,842 |
|
Cash and cash equivalents, end of period |
| $ | 2,942 |
| $ | 7,586 |
|
Noncash Investing and Financing Activities: |
|
|
|
|
|
|
|
Property, plant, and equipment included in trade accounts payable and accrued expenses |
| $ | 1,063 |
| $ | 2,049 |
|
Noncash transfer of noncontrolling interest |
| $ | 1,001 |
| $ | — |
|
Unrealized holding losses |
| $ | (3,111) |
| $ | (4,650) |
|
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | | | | | | Additional | | | | | | | | | | |
| | Common Stock | | Paid-in | | Retained | | Noncontrolling | | | | ||||||
| | Shares | | Amount | | Capital | | Earnings | | Interest | | Total | |||||
| | | | | | | | | | | | | | | | | |
Balance, October 31, 2019 | | 17,595 |
| $ | 18 |
| $ | 161,606 |
| $ | 122,557 |
| $ | 1,688 |
| $ | 285,869 |
Cumulative effect adjustment on ASC 842 related to leases | | — | | | — | | | — | | | 1,165 | | | ��� | | | 1,165 |
Exercise of stock options and income tax benefit | | 2 |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
Stock compensation expense | | — |
| | — |
| | 931 |
| | — |
| | — |
| | 931 |
Restricted stock issued | | 17 |
| | — |
| | — |
| | — |
| | — |
| | — |
Avocados de Jalisco noncontrolling interest contribution | | — |
| | — |
| | — |
| | — |
| | (63) |
| | (63) |
Net loss attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | (938) |
| | — |
| | (938) |
Balance, January 31, 2020 | | 17,614 |
| | 18 |
| | 162,584 |
| | 122,784 |
| | 1,625 |
| | 287,011 |
Exercise of stock options and income tax benefit | | 2 |
| | — |
| | 39 |
| | — |
| | — |
| | 39 |
Stock compensation expense | | — |
| | — |
| | 667 |
| | — |
| | — |
| | 667 |
Restricted stock issued | | 23 |
| | — |
| | 1,119 |
| | — |
| | — |
| | 1,119 |
Payments of minimum withholding taxes on net share settlement of equity awards | | — |
| | — |
| | (1,179) |
| | — |
| | — |
| | (1,179) |
Avocados de Jalisco noncontrolling interest contribution | | — |
| | — |
| | — |
| | — |
| | (129) |
| | (129) |
Net loss attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | (3,278) |
| | — |
| | (3,278) |
Balance, April 30, 2020 | | 17,639 |
| $ | 18 |
| $ | 163,230 |
| $ | 119,506 |
| $ | 1,496 |
| $ | 284,250 |
Stock compensation expense | | — |
| | — |
| | 852 |
| | — |
| | — |
| | 852 |
Restricted stock issued | | 18 |
| | — |
| | — |
| | — |
| | — |
| | — |
Unrealized gain on Limoneira investment, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
Avocados de Jalisco noncontrolling interest contribution | | — |
| | — |
| | — |
| | — |
| | 64 |
| | 64 |
Net loss attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | (15,636) |
| | — |
| | (15,636) |
Balance, July 31, 2020 | | 17,657 | | $ | 18 | | $ | 164,082 | | $ | 103,870 | | $ | 1,560 | | $ | 269,530 |
| | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | | | | | | Additional | | | | | | | |
| | |
| | Common Stock | | Paid-in | | Retained | | Noncontrolling | |
| | ||||||
| | Shares | | Amount | | Capital | | Earnings | | Interest | | Total | |||||
| | | | | | | | | | | | | | | | | |
Balance, October 31, 2020 | | 17,661 |
| $ | 18 |
| $ | 165,000 |
| $ | 89,512 |
| $ | 1,472 |
| $ | 256,002 |
Exercise of stock options and income tax benefit | | 2 |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
Payment of min. withholding of taxes on net share settlement of equity awards | | — | | | — | | | (467) | | | — | | | — | | | (467) |
Stock compensation expense | | — |
| | — |
| | 907 |
| | — |
| | — |
| | 907 |
Restricted stock issued | | 23 |
| | — |
| | — |
| | — |
| | — |
| | — |
Avocados de Jalisco noncontrolling interest contribution | | — |
| | — |
| | — |
| | — |
| | (40) |
| | (40) |
Net Income attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | 5,277 |
| | — |
| | 5,277 |
Balance, January 31, 2021 | | 17,686 |
| | 18 |
| | 165,487 |
| | 94,789 |
| | 1,432 |
| | 261,726 |
Exercise of stock options and income tax benefit | | — | | | — | | | — | | | — | | | — | | | — |
Stock compensation expense | | — | | | — | | | 1,357 | | | — | | | — | | | 1,357 |
Payments of minimum withholding taxes on net share settlement of equity awards | | (2) | | | — | | | (135) | | | — | | | — | | | (135) |
Avocados de Jalisco noncontrolling interest contribution | | — | | | — | | | — | | | — | | | (47) | | | (47) |
Net Income attributable to Calavo Growers, Inc. | | — | | | — | | | — | | | 8,841 | | | — | | | 8,841 |
Balance, April 30, 2021 | | 17,684 |
| $ | 18 |
| $ | 166,709 |
| $ | 103,630 |
| $ | 1,385 |
| $ | 271,742 |
Exercise of stock options and income tax benefit | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
Stock compensation expense | | — |
| | — |
| | 554 |
| | — |
| | — |
| | 554 |
Payments of minimum withholding taxes on net share settlement of equity awards | | (1) | | | — | | | (48) | | | — | | | — | | | (48) |
Avocados de Jalisco noncontrolling interest contribution | | — |
| | — |
| | — |
| | — |
| | 66 |
| | 66 |
Net loss attributable to Calavo Growers, Inc. | | — |
| | — |
| | — |
| | (12,981) |
| | — |
| | (12,981) |
Balance, July 31, 2021 | | 17,683 | | $ | 18 | | $ | 167,215 | | $ | 90,649 | | $ | 1,451 |
| $ | 259,333 |
TheSee accompanying notes are an integral part of theseto consolidated condensed financialstatements.
7
CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of the business
Business
Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a global leader in the avocado industry and an expandinga provider of value-added fresh food. Our expertise in marketing and distributing avocados, prepared avocados, and other perishable foods allows us to deliver a wide array of fresh and prepared food products to retail grocery, foodservice, club stores, mass merchandisers, food distributors and wholesalers on a worldwide basis. We procure avocados from California, Mexico and other growing regions around the world. Through our various operating facilities, we (i) sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas, (ii) create, process and package a portfolio of healthy fresh foods including fresh-cut fruit fresh-cutand vegetables, and prepared foods and (iii) process and package guacamole and salsa. We distribute our products both domestically and internationally and report our operations in three3 different business segments: Fresh products, Calavo Foods and Renaissance Food Group (RFG). and Calavo Foods.
The accompanying unaudited consolidated condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2017.2020.
Recently Adopted Accounting PronouncementsStandards
In May 2017,October 2018, the FASBFinancial Accounting Standards Board (FASB) issued an ASU, Stock Compensation (Topic 718), Scope of Modification Accounting Standards Updated (ASU) 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance clarifiesprovides that modification accounting will be applied if the value, vesting conditions or classification of the award changes. The Company adopted this new standard beginningindirect interests held through related parties in the three months ended January 31, 2018. The adoption of the amendment did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards
In January 2017, the FASB issued an ASU, Business Combinations: Clarifying the Definition of a Business, which adds guidance to assist entities with evaluating whether transactionscommon control arrangements should be accountedconsidered on a proportional basis for as acquisitions (or disposals) of assets or businesses.determining whether fees paid to decision makers and service providers are variable interests. This ASU will bewas effective for us beginning the first day of our 20192021 fiscal year. EarlyThe adoption is permitted. We do not expectof this ASU todid not have an impact untilon the Company’s consolidated financial statements.
On November 1, 2020, the Company adopted an applicable transaction takes place.
In October 2016,ASU, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update provides guidance regarding the FASB issued ancapitalization of implementation costs incurred in a cloud computing arrangement that is a service contract. This ASU Intra-Entity Transfers of Assets Other Than Inventory, which will require companies to recognize the income tax effects of intra-entity saleswas adopted prospectively and transfers ofcloud computing implementation costs incurred on November 1, 2020 or later are included in other noncurrent assets other than inventory, particularly those asset transfers involving intellectual property, in the periodconsolidated balance sheet and are presented within operating cash flows. As of July 31, 2021, capitalized implementation costs included in whichother noncurrent assets were less than $0.1 million and there was no accumulated amortization or amortization expense recorded during the transfer occurs. The ASU will be effective for us beginning the first day of our 2019 fiscal yearthree and is not expected to have a significant impact upon adoption.nine months ended July 31, 2021.
In January 2017, the FASB issued an ASU, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill
8
impairment test. The ASU permits an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU will bewas effective for us beginning the first day of our 2021 fiscal year and is not expected to have a significant impact upon adoption.
In February 2016, the FASB issued an ASU, Leases, which requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense.year. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This ASU will be effective for us beginning the first day of our 2020 fiscal year. Early adoption is permitted. Although we are in the process of evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements, we currently expect the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on our consolidated balance sheet.
In January 2016, the FASB issued an ASU, which requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The impact of the adoption of this ASU on our consolidated statements of income dependsdid not have an impact on the net unrealized gain or loss on our equity investment. AsCompany’s consolidated financial statements.
8
On November 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This standard requires a financial asset to be presented at the net unrealized lossamount expected to be collected. The financial assets of the Company in scope of ASU 2016-13 were primarily accounts receivable. The Company estimates an allowance for expected credit losses on our equity investment was $3.1 millionaccounts receivable that result from the inability of customers to make required payments. In estimating the allowance for expected credit losses, consideration is given to the current aging of receivables, historical experience, and $4.7 million.
In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance.review for potential bad debts. The standard is intended to clarify the principlesadoption of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. The standard also requires expanded disclosures surrounding revenue recognition. During fiscal 2017, the FASB issued additional clarification guidancethis ASU did not have an impact on the new revenue recognition standard which also included certain scope improvements and practical expedients. The standard (including clarification guidance issued) is effective for fiscal periods beginning after December 15, 2017, which will be our first quarter of fiscal 2019. We will adopt the new standard using the modified retrospective transition method, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings on the first day of our 2019 fiscal year. Company’s consolidated financial statements.
2. Information regarding our operations in different segments
We report our operations in three3 different business segments: (1) Fresh products, (2) Calavo Foods,RFG, and (3) RFG.Calavo Foods. These three3 business segments are presented based on how information is used by our Chief Executive Officer to measure performance and allocate resources. The Fresh products segment includes all operations that involve the distribution of avocados and other fresh produce products. The Calavo Foods segment represents all operations related to the purchase, manufacturing, and distribution of prepared products, including guacamole and salsa. The RFG segment represents all operations related to the manufacturing and distribution of fresh-cut fruit, fresh-cut vegetables, vegetables and prepared foods. The Calavo Foods segment represents operations related to the purchase, manufacturing, and distribution of prepared avocado products, including guacamole, and salsa. Selling, general and administrative expenses, as well as other non-operating income/expense items,
9
are evaluated by our Chief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them, to our operating segments. The Sales Data in the following tables is presented in thousands:
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|
|
|
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| |||||||||||||||||||||||||
|
| Three months ended January 31, 2018 |
| Three months ended January 31, 2017 |
| |||||||||||||||||||||||||||||||||||||||||||||
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|
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|
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|
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| |||||||||||||||||||||||||
|
| Fresh |
| Calavo |
|
|
|
|
|
|
| Fresh |
| Calavo |
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
|
| products |
| Foods |
| RFG |
| Total |
| products |
| Foods |
| RFG |
| Total |
| |||||||||||||||||||||||||||||||||
Third-party sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | Three months ended July 31, 2021 | | Three months ended July 31, 2020 | | |||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
|
| Fresh |
| |
| Calavo |
| | |
| Fresh |
| |
| Calavo |
| | | | |||||||||||||||||||||||||||||||
| | products | | RFG | | Foods | | Total | | products | | RFG | | Foods | | Total | | |||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
Avocados |
| $ | 108,929 |
| $ | — |
| $ | — |
| $ | 108,929 |
| $ | 104,716 |
| $ | — |
| $ | — |
| $ | 104,716 |
| | $ | 148,757 | | $ | — | | $ | — | | $ | 148,757 | | $ | 145,670 | | $ | — | | $ | — | | $ | 145,670 | |
Tomatoes |
|
| 12,084 |
|
| — |
|
| — |
|
| 12,084 |
|
| 5,270 |
|
| — |
|
| — |
|
| 5,270 |
| |
| 11,344 | |
| — | |
| — | |
| 11,344 | |
| 13,827 | |
| — | |
| — | |
| 13,827 | |
Papayas |
|
| 2,805 |
|
| — |
|
| — |
|
| 2,805 |
|
| 2,364 |
|
| — |
|
| — |
|
| 2,364 |
| |
| 2,683 | |
| — | |
| — | |
| 2,683 | |
| 2,695 | |
| — | |
| — | |
| 2,695 | |
Other fresh products |
|
| 34 |
|
| — |
|
| — |
|
| 34 |
|
| 111 |
|
| — |
|
| — |
|
| 111 |
| |||||||||||||||||||||||||
Other fresh income | |
| 95 | |
| — | |
| — | |
| 95 | |
| 88 | |
| — | |
| — | |
| 88 | | |||||||||||||||||||||||||
Prepared avocado products |
|
| — |
|
| 21,803 |
|
| — |
|
| 21,803 |
|
| — |
|
| 19,250 |
|
| — |
|
| 19,250 |
| |
| — | |
| — | |
| 22,095 | |
| 22,095 | |
| — | |
| — | |
| 19,764 | |
| 19,764 | |
Salsa |
|
| — |
|
| 865 |
|
| — |
|
| 865 |
|
| — |
|
| 1,098 |
|
| — |
|
| 1,098 |
| |
| — | |
| — | |
| 746 | |
| 746 | |
| — | |
| — | |
| 816 | |
| 816 | |
Fresh-cut fruit & vegetables and prepared foods |
|
| — |
|
| — |
|
| 106,776 |
|
| 106,776 |
|
| — |
|
| — |
|
| 98,047 |
|
| 98,047 |
| |||||||||||||||||||||||||
Fresh-cut fruit & veg. and prepared foods | | | — | | | 107,846 | | | — | | | 107,846 | | | — | | | 91,200 | | | — | | | 91,200 | | |||||||||||||||||||||||||
Total gross sales |
|
| 123,852 |
|
| 22,668 |
|
| 106,776 |
|
| 253,296 |
|
| 112,461 |
|
| 20,348 |
|
| 98,047 |
|
| 230,856 |
| |
| 162,879 | |
| 107,846 | |
| 22,841 | |
| 293,566 | |
| 162,280 | |
| 91,200 | |
| 20,580 | |
| 274,060 | |
Less sales incentives |
|
| (652) |
|
| (2,778) |
|
| (670) |
|
| (4,100) |
|
| (276) |
|
| (2,701) |
|
| (340) |
|
| (3,317) |
| |
| (1,299) | |
| (4,060) | |
| (1,528) | |
| (6,887) | |
| (141) | |
| (277) | |
| (1,613) | |
| (2,031) | |
Less inter-company eliminations |
|
| (415) |
|
| (853) |
|
| — |
|
| (1,268) |
|
| (126) |
|
| (859) |
|
| — |
|
| (985) |
| | | (672) | | | — | | | (999) | | | (1,671) | | | (399) | | | — | | | (1,205) | | | (1,604) | |
Net sales |
| $ | 122,785 |
| $ | 19,037 |
| $ | 106,106 |
| $ | 247,928 |
| $ | 112,059 |
| $ | 16,788 |
| $ | 97,707 |
| $ | 226,554 |
| | $ | 160,908 | | $ | 103,786 | | $ | 20,314 | | $ | 285,008 | | $ | 161,740 | | $ | 90,923 | | $ | 17,762 | | $ | 270,425 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fresh |
| Calavo |
|
|
|
|
|
|
| ||
|
| products |
| Foods |
| RFG |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales before intercompany eliminations |
| $ | 123,200 |
| $ | 19,890 |
| $ | 106,106 |
| $ | 249,196 |
|
Intercompany eliminations |
|
| (415) |
|
| (853) |
|
| — |
|
| (1,268) |
|
Net sales |
|
| 122,785 |
|
| 19,037 |
|
| 106,106 |
|
| 247,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales before intercompany eliminations |
|
| 108,905 |
|
| 13,620 |
|
| 100,361 |
|
| 222,886 |
|
Intercompany eliminations |
|
| (377) |
|
| (558) |
|
| (333) |
|
| (1,268) |
|
Cost of sales |
|
| 108,528 |
|
| 13,062 |
|
| 100,028 |
|
| 221,618 |
|
Gross profit |
| $ | 14,257 |
| $ | 5,975 |
| $ | 6,078 |
| $ | 26,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales before intercompany eliminations |
| $ | 112,185 |
| $ | 17,647 |
| $ | 97,707 |
| $ | 227,539 |
|
Intercompany eliminations |
|
| (126) |
|
| (859) |
|
| — |
|
| (985) |
|
Net sales |
|
| 112,059 |
|
| 16,788 |
|
| 97,707 |
|
| 226,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales before intercompany eliminations |
|
| 104,308 |
|
| 12,291 |
|
| 89,016 |
|
| 205,615 |
|
Intercompany eliminations |
|
| (100) |
|
| (594) |
|
| (291) |
|
| (985) |
|
Cost of sales |
|
| 104,208 |
|
| 11,697 |
|
| 88,725 |
|
| 204,630 |
|
Gross profit |
| $ | 7,851 |
| $ | 5,091 |
| $ | 8,982 |
| $ | 21,924 |
|
9
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended July 31, 2021 | | Nine months ended July 31, 2020 | | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Fresh |
| |
| Calavo |
| | |
| Fresh |
| |
| Calavo |
| | | | ||||||
| | products | | RFG | | Foods | | Total | | products | | RFG | | Foods | | Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Avocados | | $ | 398,887 | | $ | — | | $ | — | | $ | 398,887 | | $ | 413,335 | | $ | — | | $ | — | | $ | 413,335 | |
Tomatoes | |
| 33,963 | |
| — | |
| — | |
| 33,963 | |
| 46,151 | |
| — | |
| — | |
| 46,151 | |
Papayas | |
| 8,081 | |
| — | |
| — | |
| 8,081 | |
| 7,677 | |
| — | |
| — | |
| 7,677 | |
Other fresh income | |
| 548 | |
| — | |
| — | |
| 548 | |
| 328 | |
| — | |
| — | |
| 328 | |
Prepared avocado products | |
| — | |
| — | |
| 59,848 | |
| 59,848 | |
| — | |
| — | |
| 60,683 | |
| 60,683 | |
Salsa | |
| — | |
| — | |
| 2,154 | |
| 2,154 | |
| — | |
| — | |
| 2,143 | |
| 2,143 | |
Fresh-cut fruit & veg. and prepared foods | | | — | | | 296,107 | | | — | | | 296,107 | | | — | | | 306,853 | | | — | | | 306,853 | |
Total gross sales | |
| 441,479 | |
| 296,107 | |
| 62,002 | |
| 799,588 | |
| 467,491 | |
| 306,853 | |
| 62,826 | |
| 837,170 | |
Less sales incentives | |
| (2,754) | |
| (5,727) | |
| (3,494) | |
| (11,975) | |
| (1,294) | |
| (1,467) | |
| (5,522) | |
| (8,283) | |
Less inter-company eliminations | | | (1,915) | | | — | | | (3,291) | | | (5,206) | | | (1,098) | | | — | | | (2,848) | | | (3,946) | |
Net sales | | $ | 436,810 | | $ | 290,380 | | $ | 55,217 | | $ | 782,407 | | $ | 465,099 | | $ | 305,386 | | $ | 54,456 | | $ | 824,941 | |
| | | | | | | | | | | | | | | | |
|
| Fresh |
| |
| Calavo |
| Interco. |
| | | | ||||
| | products | | RFG | | Foods | | Elimins. | | Total | | |||||
| | (All amounts are presented in thousands) | | |||||||||||||
Three months ended July 31, 2021 | | | | | | | | | | | | | | | | |
Net sales | | $ | 161,580 | | $ | 103,786 | | $ | 21,313 | | $ | (1,671) | | $ | 285,008 | |
Cost of sales | | | 149,378 | | | 109,375 | | | 20,059 | | | (1,671) | | | 277,141 | |
Gross profit | | $ | 12,202 | | $ | (5,589) | | $ | 1,254 | | $ | — | | $ | 7,867 | |
| | | | | | | | | | | | | | | | |
Three months ended July 31, 2020 | | | | | | | | | | | | | | | | |
Net sales | | $ | 162,139 | | $ | 90,923 | | $ | 18,967 | | $ | (1,604) | | $ | 270,425 | |
Cost of sales | | | 144,405 | | | 82,868 | | | 13,921 | | | (1,604) | | | 239,590 | |
Gross profit | | $ | 17,734 | | $ | 8,055 | | $ | 5,046 | | $ | — | | $ | 30,835 | |
| | | | | | | | | | | | | | | | |
Nine months ended July 31, 2021 | | | | | | | | | | | | | | | | |
Net sales | | $ | 438,725 | | $ | 290,380 | | $ | 58,508 | | $ | (5,206) | | $ | 782,407 | |
Cost of sales | | | 398,370 | | | 293,704 | | | 47,233 | | | (5,206) | |
| 734,101 | |
Gross profit | | $ | 40,355 | | $ | (3,324) | | $ | 11,275 | | $ | — | | $ | 48,306 | |
| | | | | | | | | | | | | | | | |
Nine months ended July 31, 2020 | | | | | | | | | | | | | | | | |
Net sales | | $ | 466,197 | | $ | 305,386 | | $ | 57,304 | | $ | (3,946) | | $ | 824,941 | |
Cost of sales | | | 427,476 | | | 291,720 | | | 40,973 | | | (3,946) | | | 756,223 | |
Gross profit | | $ | 38,721 | | $ | 13,666 | | $ | 16,331 | | $ | — | | $ | 68,718 | |
For the three months ended JanuaryJuly 31, 20182021 and 2017, inter-segment2020, intercompany sales and cost of sales of $0.8 million and $0.4 million between Fresh products and $0.1RFG were eliminated. For the nine months ended July 31, 2021 and 2020, intercompany sales and cost of sales of $1.9 million and $1.1 million between Fresh products and RFG were eliminated. For the three months ended JanuaryJuly 31, 20182021 and 2017, inter-segment2020, intercompany sales and cost of sales of $0.9$1.0 million and $1.2 million between Calavo Foods and RFG were eliminated. For the threenine months ended JanuaryJuly 31, 2018, inter-segment2021 and 2020, intercompany sales and cost of sales of $0.1$3.3 million and $2.8 million between Fresh products and Calavo Foods and RFG were eliminated.
Sales to customers outside the U.S. were approximately $8.8 million, and $6.5 million for the three months ended July 31, 2021 and 2020. Sales to customers outside the U.S. were approximately $25.7 million, and $21.9 million for the nine months ended July 31, 2021 and 2020.
10
3.InventoriesOur foreign operations in Mexico are subject to exchange rate fluctuations and foreign currency transaction costs. The functional currency of our foreign subsidiaries in Mexico is the United States dollar (U.S. dollar). As a result, monetary assets and liabilities are translated into U.S. dollars at exchange rates as of the balance sheet date and non-monetary assets, liabilities and equity are translated at historical rates. Sales and expenses are translated using a weighted-average exchange rate for the period. Gains and losses resulting from those remeasurements and foreign currency transactions are recognized within cost of sales. We recognized foreign currency remeasurement losses in the current quarter. These losses were due primarily to certain long-term net peso receivables. Foreign currency remeasurement gains, net of losses, for the three months ended July 31, 2021 and 2020 was $0.6 million and $1.4 million. Foreign currency remeasurement gains, net of losses, for the nine months ended July 31, 2021 was $1.2 million. Foreign currency remeasurement losses, net of gains, for the nine months ended July 31, 2020 was $1.9 million.
Long-lived assets attributed to geographic areas as of July 31, 2021 and October 31, 2020, are as follows (in thousands):
| | | | | | | | | |
|
| United States |
| Mexico |
| Consolidated | |||
July 31, 2021 | | $ | 89,218 | | $ | 39,862 | | $ | 129,080 |
October 31, 2020 | | $ | 95,110 | | $ | 35,160 | | $ | 130,270 |
3. | Inventories |
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
| |||||||
|
| January 31, |
| October 31, |
| |||||||||
|
| 2018 |
| 2017 |
| |||||||||
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
| | July 31, | | October 31, | | |||||||||
| | 2021 | | 2020 | | |||||||||
| | | | | | | | |||||||
Fresh fruit |
| $ | 13,484 |
| $ | 14,566 |
|
| $ | 20,659 |
| $ | 14,677 | |
Packing supplies and ingredients |
|
| 10,220 |
|
| 9,755 |
| |
| 15,842 | |
| 12,540 | |
Finished prepared foods |
|
| 7,480 |
|
| 6,537 |
| |
| 10,942 | |
| 14,570 | |
|
| $ | 31,184 |
| $ | 30,858 |
| |||||||
| | $ | 47,443 | | $ | 41,787 | |
Inventories are stated at the lower of cost or net realizable value. We periodically review the value of items in inventory and record any necessary write downs of inventory based on our assessment of market conditions. We recorded a write downInventory includes reserves of $0.2 million to adjust our finished prepared foodsand $0.2 million in slow moving and obsolete packing supply inventory to the lower of cost or net realizable value as of JanuaryJuly 31, 2018. We recorded a write down of $0.4 million to adjust our fresh fruit2021 and October 31, 2020. NaN additional inventory to the lower of cost or net realizable valuereserve was considered necessary as of July 31, 2021 and October 31, 2017.2020.
4. | Related party transactions |
4.Related party transactions
Certain members of our Board of Directors market California avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers. DuringFor the three months ended JanuaryJuly 31, 20182021 and 2017,2020, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $0.1$10.4 million and $0.5$9.1 million. For the nine months ended July 31, 2021 and 2020, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $15.4 million and $15.3 million. Amounts payable to these Board members were $0.1$4.5 million as of JanuaryJuly 31, 2018.2021. We did not0t have any amounts payable to these Board members as of October 31, 2017.2020.
During the three months ended JanuaryJuly 31, 20182021 and 2017,2020, we received $0.1 million and $0.2 million as dividend income from Limoneira Company (Limoneira). During the nine months ended July 31, 2021 and 2020, we received $0.3 million and $0.4 million as dividend income from Limoneira. In addition, we lease office space from Limoneira andfor our corporate office. We paid rental expenses ofrent expense to Limoneira totaling $0.1 million for each of the three months ended JanuaryJuly 31, 20182021 and 2017.2020. We paid rent expense to Limoneira totaling $0.3 million for the nine months ended July 31, 2021 and 2020. Harold Edwards, who is a member of our Board of Directors, is the Chief Executive Officer of Limoneira Company. WeAs of July 31, 2021, we own approximately 9% of Limoneira’s outstanding shares.
11
Calavo and Agricola Belher (“Belher”) have a 12%an equal one-half ownership interest in Limoneira. Additionally, our Chief Executive Officer is a member of the Limoneira Board of Directors.
We currently have a member of our Board of Directors who also serves as a partner in the law firm of TroyGould PC, which frequently represents Calavo as legal counsel. During each of the three months ended January 31, 2018 and 2017, Calavo Growers, Inc. paid fees totaling less than $0.1 million and $0.1 million to TroyGould PC.
In December 2014, Calavo formed a wholly owned subsidiary Calavo Growers De Mexico, S. de R.L. de C.V. (Calavo Sub). In July 2015, Calavo Sub entered into a Shareholder Agreement with Grupo Belo del Pacifico, S.A. de C.V., (Belo) a Mexican Company owned by Agricola Belher, and formed Agricola Don Memo, S.A. de C.V. (Don Memo). Belo and Calavo Sub have an equal one-half ownership interest in (“Don Memo.Memo”). Pursuant to a management service agreement, Belo,Belher, through its officers and employees, has day-to-day power and authority to manage the operations. Belo is entitled to a management fee, as defined, which is payable annually in July of each year. Additionally, Calavo Sub is entitled to commission, for the sale of produce in the Mexican National Market, United States, Canada, and any other overseas market.
In January 2016, our unconsolidated subsidiary, Don Memo entered into a loan agreement in the amount of $4.5 million with Bank of America, N.A. (BoA) proceeds of which were used by Don Memo to repay debt owed to Calavo. Also in January 2016, Calavo and BoA, entered into a Continuing and Unconditional Guaranty Agreement (the Guaranty). Under the terms of the Guaranty, Calavo unconditionally guarantees and promises to pay BoA any and all Indebtedness, as defined therein, of our unconsolidated subsidiary Don Memo to BoA. Belo has also entered into a similar guarantee with BoA.
11
As of JanuaryJuly 31, 20182021, and October 31, 2017,2020, we havehad an investment of $5.2$4.3 million and $4.6$6.0 million, representing Calavo Sub’sCalavo’s 50% ownership in Don Memo, which iswas included as an investment in unconsolidated entities on our balance sheet. We make advances to Don Memo for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under our marketing program to Don Memo, net of our commission and aforementioned advances. As of JanuaryJuly 31, 20182021 and October 31, 2017,2020, we had outstanding advances of $1.0$4.2 million and $1.6$2.4 million to Don Memo. In October 2020, we entered into an infrastructure loan agreement with Don Memo for up to $2.4 million secured by certain property and equipment of Don Memo. This infrastructure loan accrues interest at 7.25%. In October 2020, we funded $0.7 million related to this loan agreement, and we funded an additional $0.7 million, and $0.6 million in the first, and second quarters of fiscal 2021, for a total outstanding balance at July 31, 2021 of $2.0 million. This infrastructure loan agreement will mature in fiscal 2024. Of these infrastructure advances $0.4 million was recorded as a receivable in prepaid and other current assets as of July 31, 2021. The remaining $1.6 million of these infrastructure advances were recorded in other assets. During the three months ended JanuaryJuly 31, 20182021 and 2017,2020, we recorded $3.7incurred $5.7 million and $0.7$10.6 million of expensescost of sales to Don Memo pursuant to our purchase consignment agreement. During the nine months ended July 31, 2021 and 2020, we incurred $9.6 million and $15.2 million of cost of sales to Don Memo pursuant to our purchase consignment agreement.
We make advances to Belher for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under our marketing program to Belher, net of our commission and aforementioned advances. We had grower advances due from Belher of $4.0totaling $3.5 million and $4.5 million as of JanuaryJuly 31, 20182021 and October 31, 2017,2020, which are netted against the grower payable. In addition, we had infrastructure advances due from Belher of $0.6$1.8 million as of JanuaryJuly 31, 20182021 and October 31, 2017.2020. Of these infrastructure advances $0.2$1.8 million and $0.9 million was recorded as a receivable in prepaid and other current assets.assets as of July 31, 2021 and October 31, 2020. The remaining $0.4$0.9 million of these infrastructure advances arewere recorded in other assets as of October 31, 2020. In July 2021, we made a bridge loan of $3.5 million to Belher which is due in December 2021, and which is secured by certain farmland in Mexico. The loan accrues interest at 10 percent. This bridge loan has been recorded in prepaid expenses and other current assets. During the three months ended JanuaryJuly 31, 20182021 and 2017,2020, we recorded $5.9incurred $1.8 million and $3.8$4.0 million of expensescost of sales to Belher pursuant to our purchase consignment agreement. During the nine months ended July 31, 2021 and 2020, we incurred $16.3 million and $23.6 million of cost of sales to Belher pursuant to our purchase consignment agreement.
In August 2015, we entered into a Shareholder’s Agreement with various Mexican partners and created Avocados de Jalisco, S.A.P.I. de C.V. (“Avocados de Jalisco”). Avocados de Jalisco is a Mexican corporation created to engage in procuring, packing and selling avocados. ThisAs of July 31, 2021, this entity iswas approximately 83% owned by Calavo and iswas consolidated in our financial statements. Avocados de Jalisco has built a packinghouse located in Jalisco, Mexico, and such packinghouse has begunwhich began operations in June of 2017. As of January 31, 2018 and October 31, 2017, we have made preseason advances of approximately $0.1 million to various partners of Avocados de Jalisco. During the three months ended JanuaryJuly 31, 2018,2021 and 2020, we purchased approximately $0.2$2.2 million and $3.5 million of avocados from the partners of Avocados de Jalisco. In January 2018, we transferred $1.0 million of interest toDuring the Avocados de Jalisco noncontrolling members.
As of January 31, 2018, we have an approximate 40% ownership interest in FreshRealm, LLC (FreshRealm). Three officers and five members of our board of directors have investments in FreshRealm. In addition, as of January 31, 2018 and October 31, 2017, we have a loan to FreshRealm members of approximately $0.3 million. In April 2017, FreshRealm initiated another round of financing. From April 2017 to January 2018, we have invested $7.5 million in FreshRealm. In October and December 2017, our Chairman and Chief Executive Officer invested $7.0 million and $1.5 million into FreshRealm. In January 2018, one of our non-executive directors invested $1.8 million into FreshRealm.
We provide storage services to FreshRealm from our New Jersey Value-Added Depot, and our RFG Riverside facility. We have received less than $0.1 million in storage services revenue from FreshRealm in the three months ended January 31, 2018. In addition, during the three months ended January 31, 2018 and 2017, RFG has sold $1.5 million and $1.1 million of products to FreshRealm.
The previous owners of RFG, one of which is currently an officer of Calavo, have a majority ownership of certain entities that provide various services to RFG, specifically LIG Partners, LLC and THNC, LLC. One of RFG’s California operating facilities leases a building from LIG Partners, LLC (LIG) pursuant to an operating lease. RFG’s Texas operating facility leases a building from THNC, LLC (THNC) pursuant to an operating lease. See the following tables for the related party activity for the three and nine months ended JanuaryJuly 31, 20182021 and 2017:2020, we purchased approximately $5.4 million and $5.4 million of avocados from the partners of Avocados de Jalisco.
|
|
|
|
|
|
|
|
|
| Three months ended January 31, |
| ||||
(in thousands) |
| 2018 |
| 2017 |
| ||
Rent paid to LIG |
| $ | 139 |
| $ | 135 |
|
Rent paid to THNC, LLC |
| $ | 199 |
| $ | 76 |
|
FreshRealm is a start-up company, engaged in activities relating to the marketing of food products directly to consumers or other entities. On February 3, 2021, Calavo and FreshRealm entered into a Limited Liability Company Member Separation and Release Agreement (the Separation Agreement). Prior to the Separation Agreement, we had an equity investment in FreshRealm representing approximately 37% ownership of FreshRealm. We recorded an impairment of 100% of this equity investment, or $2.8 million, in the third quarter of fiscal 2020. We had a note receivable and trade receivables of approximately $34.5 million at October 31, 2020 (which includes accrued interest) from FreshRealm. We recorded a reserve of $34.5 million on this balance in the third quarter of fiscal 2020.
Pursuant to the Separation Agreement among other terms: (i) Calavo terminated its limited liability company interest and equity ownership in FreshRealm; (ii) Calavo and FreshRealm simultaneously entered into an Amended and Restated
12
Senior Secured Loan Agreement and Promissory Note (the “Amended Note”), which amended and restated the Prior Note; (iii) FreshRealm issued an additional Secured Promissory Note to Calavo in the amount of approximately $5 million that is subordinated to the Amended Note (the “Second Note”, together with the Amended Note, the “Notes”); (iv) in the event FreshRealm pays Calavo the sum of $6 million (the “Loan Payoff Amount”) by March 31, 2022 (the “Loan Payoff Period”), the Notes shall be deemed paid in full; (v) the parties agreed to a mutual release of any claims; and (vi) the parties agreed to indemnify each other from any subsequent third party claims.
5.Other assets
In July 2021, FreshRealm paid Calavo the Loan Payoff Amount of $6.0 million, and we recorded the receipt as a recovery of the reserve for collectability of the FreshRealm note receivable on the statement of operations. Therefore, the Notes mentioned above have been deemed paid in full. See Note 12 for more information.
5. | Other assets |
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
| January 31, |
| October 31, |
| ||
|
| 2018 |
| 2017 |
| ||
Intangibles, net |
| $ | 1,945 |
| $ | 2,226 |
|
Mexican IVA (i.e. value-added) taxes receivable |
|
| 19,750 |
|
| 18,174 |
|
Infrastructure advance to Agricola Belher |
|
| 400 |
|
| 400 |
|
Loan to FreshRealm members |
|
| 318 |
|
| 315 |
|
Notes receivable from San Rafael |
|
| 381 |
|
| 493 |
|
Other |
|
| 1,181 |
|
| 1,183 |
|
|
| $ | 23,975 |
| $ | 22,791 |
|
| | | | | | | |
|
| July 31, |
| October 31, | | ||
| | 2021 | | 2020 | | ||
Mexican IVA (i.e. value-added) taxes receivable (see note 11) | | $ | 36,978 | | $ | 30,126 | |
Infrastructure advances to Agricola Belher and Agricola Don Memo | |
| 1,641 | |
| 1,215 | |
Other | |
| 1,387 | |
| 1,217 | |
| | $ | 40,006 | | $ | 32,558 | |
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
| January 31, 2018 |
| October 31, 2017 |
| |||||||||||||||||||||||||||||||||||
|
| Weighted- |
| Gross |
|
|
|
| Net |
| Gross |
|
|
|
| Net |
| |||||||||||||||||||||||||
|
| Average |
| Carrying |
| Accum. |
| Book |
| Carrying |
| Accum. |
| Book |
| |||||||||||||||||||||||||||
|
| Useful Life |
| Value |
| Amortization |
| Value |
| Value |
| Amortization |
| Value |
| |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
| | | | July 31, 2021 | | October 31, 2020 | | |||||||||||||||||||||||||||||||||||
|
| Weighted- |
| Gross |
| | | | Net |
| Gross |
| | |
| Net | | |||||||||||||||||||||||||
| | Average | | Carrying | | Accum. | | Book | | Carrying | | Accum. | | Book | | |||||||||||||||||||||||||||
| | Useful Life | | Value | | Amortization | | Value | | Value | | Amortization | | Value | | |||||||||||||||||||||||||||
Customer list/relationships |
| 8.0 years |
| $ | 7,640 |
| $ | (6,412) |
| $ | 1,228 |
| $ | 7,640 |
| $ | (6,181) |
| $ | 1,459 |
|
| 7 years | | $ | 17,340 | | $ | (9,661) | | $ | 7,679 | | $ | 17,340 | | $ | (8,613) | | $ | 8,727 | |
Trade names |
| 8.3 years |
|
| 2,760 |
|
| (2,567) |
|
| 193 |
|
| 2,760 |
|
| (2,529) |
|
| 231 |
|
| 11 years | |
| 4,060 | |
| (2,943) | |
| 1,117 | |
| 4,060 | |
| (2,852) | |
| 1,208 | |
Trade secrets/recipes |
| 9.3 years |
|
| 630 |
|
| (381) |
|
| 249 |
|
| 630 |
|
| (369) |
|
| 261 |
|
| 9 years | |
| 630 | |
| (564) | |
| 66 | |
| 630 | |
| (517) | |
| 113 | |
Brand name intangibles |
| indefinite |
|
| 275 |
|
| — |
|
| 275 |
|
| 275 |
|
| — |
|
| 275 |
|
| indefinite | |
| 275 | |
| — | |
| 275 | |
| 275 | |
| — | |
| 275 | |
Intangibles, net |
|
|
| $ | 11,572 |
| $ | (9,627) |
| $ | 1,945 |
| $ | 11,572 |
| $ | (9,346) |
| $ | 2,226 |
| | | | $ | 22,305 | | $ | (13,168) | | $ | 9,137 | | $ | 22,305 | | $ | (11,982) | | $ | 10,323 | |
We anticipate recording amortization expense of approximately $0.8$0.4 million for the remainder of fiscal 2018, $0.72021, $1.6 million for fiscal year 2019, $0.12022, $1.5 million for fiscal year 2020, $0.12023, $1.5 million for fiscal year 2021,2024, and $0.1$3.9 million for thereafter, through fiscal year 2023.thereafter.
6. | Stock-Based Compensation |
See Note 11 for additional information related to Mexican IVA taxes.
6.Stock-Based Compensation
In April 2011, our shareholders approved the Calavo Growers, Inc. 2011 Management Incentive Plan (the “2011 Plan”). All directors, officers, employees and consultants (including prospective directors, officers, employees and consultants) of Calavo and its subsidiaries are eligible to receive awards under the 2011 Plan. UpShares were issuable under the 2011 Plan through December 2020. On April 21, 2021, the shareholders of Calavo approved the Calavo Growers, Inc. 2020 equity incentive plan. This is a ten-year plan, with up to 1,500,000 shares issuable through December 2031.
In April 2021, the Board of common stock may be issued by Calavo underDirectors approved the 2011 Plan.vesting of all of the remaining restricted shares outstanding to our former Chief Executive Officer and Board member. With this vesting, we recognized stock-based compensation of $0.7 million for the nine months ended July 31, 2021.
On JanuaryNovember 2, 2018, all 122020, 11 of our non-employee directors were each granted 1,7501,500 restricted shares, eachas part of their annual compensation (total of 21,00016,500 shares). These shares have full voting rights and participate in dividends as if unrestricted. The closing price of our stock on such date was $85.90.$67.97. On January 2, 2019,2022, as long as the directors are still serving on the board, these shares lose their restriction and become non-forfeitable and transferable.will fully vest. These shares were granted pursuant to our 2011 Plan. The total
13
recognized stock-based compensation expense for these grants was $0.2$0.3 million for the three months ended JanuaryJuly 31, 2018. 2021. The total recognized stock-based compensation expense for these grants was $0.6 million for the nine months ended July 31, 2021.
On December 18, 2017,November 2, 2020, our executive officers were granted a total of 25,2419,334 restricted shares. These shares have full voting rights and participate in dividends as if unrestricted. The closing price of our stock on such date was $75.45.$67.97. These shares vest in one-third increments,over two years, on an annual basis, beginning December 18, 2018.November 2, 2021. These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense for these grants was $0.1 million for the three months ended JanuaryJuly 31, 2018. 2021. The total recognized stock-based compensation expense for these grants was $0.2 million for the nine months ended July 31, 2021.
On October 31, 2017,November 2, 2020, certain key employees were granted a membertotal of the management team at RFG resigned. His unvested portion of2,600 restricted stock issuedshares. These shares have full voting rights and participate in December of 2016 and January of 2016 were forfeited. On January 25, 2018, in consideration of and in
13
exchange for his forfeiture of restricted shares upon his resignation, the board of directors granted 10,788 shares of unrestricted stock, which immediately vested.dividends as if unrestricted. The closing price of our stock on such date was $87.10. We recorded for this grant $0.8 million of$67.97. These shares vest over three years, on an annual basis, beginning November 2, 2021. These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense infor these grants were insignificant for the three months and for the nine months ended July 31, 2021.
In June 2021, our fiscal first quarter of 2018.
On February 2, 2017, our Vice President of the Foods Division retiredformer chief financial officer, resigned from Calavo for medical reasons. In January 2018, per the terms of our 2011 Plan and the respective employee award, the board of directors awarded the portion of the fiscal 2017 management bonus for the percentage of the year worked. As a result, he was granted 8675,418 restricted shares of unrestricted stock, which immediately vested. As a result, we recorded $0.1 million of stock-based compensation expense in our fiscal first quarter of 2018.were forfeited.
A summary of restricted stock activity, related to our 2011 Management Incentive Plan, is as follows (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
| Weighted-Average |
| Aggregate |
| |||||||||||
|
| Number of Shares |
| Grant Price |
| Intrinsic Value |
| |||||||||||
Outstanding at October 31, 2017 |
| 103 |
| $ | 54.64 |
|
|
|
| |||||||||
| | | | | | | | | | |||||||||
|
|
|
| Weighted-Average |
| Aggregate |
| |||||||||||
|
| Number of Shares |
| Grant Price |
| Intrinsic Value |
| |||||||||||
Outstanding at October 31, 2020 |
| 76 | | $ | 80.45 | | | | | |||||||||
Vested |
| (56) |
| $ | 54.27 |
|
|
|
|
| (50) | | $ | 78.14 | | | | |
Forfeited |
| (7) |
| $ | 52.69 |
|
|
|
| | (5) | | $ | 63.77 | | | | |
Granted |
| 47 |
| $ | 80.20 |
|
|
|
|
| 28 | | $ | 67.97 | | | | |
Outstanding at January 31, 2018 |
| 87 |
| $ | 68.08 |
| $ | 7,569 |
| |||||||||
Outstanding at July 31, 2021 |
| 49 | | $ | 73.71 | | $ | 2,754 | |
The total recognized stock-based compensation expense for restricted stock was $1.8$0.6 million and $0.9 million for the three months ended JanuaryJuly 31, 20182021 and 2017.2020. The total recognized stock-based compensation expense for restricted stock was $2.8 million and $3.6 million for the nine months ended July 31, 2021 and 2020. Total unrecognized stock-based compensation expense totaled $5.7 million and $3.0$3.1 million as of JanuaryJuly 31, 2018 and October 31, 2017,2021 and will be amortized through fiscal year 2020.2023.
Stock options are granted with exercise prices of not less than the fair market value at grant date, generally vest over one to five years and generally expire two to five years after the grantvest 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 date of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to vest. We measure the fair value of our stock basedstock-based compensation awards on the date of grant.
A summary of stock option activity, related to our 2005 Stock Incentive Plan, is as follows (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
| Aggregate |
| ||
|
| Number of Shares |
| Exercise Price |
| Intrinsic Value |
| ||
Outstanding at October 31, 2017 |
| 7 |
| $ | 18.54 |
|
|
|
|
Exercised |
| (3) |
| $ | 17.66 |
|
|
|
|
Outstanding at January 31, 2018 |
| 4 |
| $ | 19.20 |
| $ | 348 |
|
Exercisable at January 31, 2018 |
| 4 |
| $ | 19.20 |
| $ | 348 |
|
At January 31, 2018, outstanding and exercisable stock options had a weighted-average remaining contractual term of 2.1 years. The total recognized and unrecognized stock-based compensation expense was insignificant for the three months ended January 31, 2018.
14
A summary of stock option activity, related to our 2011 Management Incentive Plan, is as follows (in thousands, except for per share amounts):
| | | | | | | | | |
|
| |
| Weighted-Average |
| Aggregate | | ||
| | | | Exercise | | Intrinsic | | ||
| | Number of Shares | | Price | | Value | | ||
Outstanding at October 31, 2020 |
| 16 | | $ | 44.21 | | | | |
Exercised |
| (2) | | $ | 23.48 | | | | |
Outstanding at July 31, 2021 |
| 14 | | $ | 47.17 | | $ | 128 | |
Exercisable at July 31, 2021 |
| 12 | | $ | 45.59 | | $ | 129 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
| Aggregate |
| ||
|
|
|
| Exercise |
| Intrinsic |
| ||
|
| Number of Shares |
| Price |
| Value |
| ||
Outstanding at October 31, 2017 |
| 20 |
| $ | 40.07 |
|
|
|
|
Outstanding at January 31, 2018 |
| 20 |
| $ | 40.07 |
| $ | 938 |
|
Exercisable at January 31, 2018 |
| 12 |
| $ | 29.01 |
| $ | 695 |
|
14
At JanuaryJuly 31, 2018,2021, outstanding and exercisable stock options had a weighted-average remaining contractual term of 5.0 2.8 years. The total recognized and unrecognized stock-based compensation expense was insignificant for the three and nine months ended JanuaryJuly 31, 2018. 2021 and 2020.
7. | Other events |
7.Other events
Dividend payment
On December 8, 2017,4, 2020, we paid a $0.95$1.15 per share dividend in the aggregate amount of $16.7$20.3 million to shareholders of record on November 17, 2017.13, 2020.
Litigation
We are currently a named defendant in two class action lawsuits filed in Superior state courts in California alleging violations of California wage-and-hour laws, failure to pay overtime, failure to pay for missed meal and rest periods, failure to provide accurate itemized wage statements, failure to pay all wages due at the time of termination or resignation, as well as statutory penalties for violation of the California Labor Code and Minimum Wage Order-2014.
In August 2017, the parties reached a tentative settlement of the case, whereby we agreed to pay $0.4 million to resolve the allegations and avoid further distraction that would result if the litigation continued. The settlement is subject to court approval. The Company recorded $0.4 million as a selling, general and administrative expense in the third quarter of fiscal 2017. Though we are still awaiting court approval of the aforementioned settlement agreement, we believe this process will conclude in fiscal 2018, with no significant change in expense.
From time to time, we are also involved in other litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.
Mexico tax audits
We conduct business both domestically and internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in the normal course of business, we are subject to examination by taxing authorities, primarily in Mexico and the United States.
2011 Assessment
During our third quarter of fiscal 2016, our wholly-owned subsidiary, Calavo de Mexico (“CDM”)(CDM), received a written communication from the Ministry of Finance and Administration of the government of the State of Michoacan, Mexico (“MFM”)(MFM) containing preliminary observations related to a fiscal 2011 tax audit of such subsidiary. MFM’s preliminary observations outline certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and Value Added Tax (“VAT”)(IVA). During the period from our fourth fiscal quarter of 2016 through our first fiscal quarter of 2019, we provided a written rebuttalattempted to MFM’s preliminary observationsresolve our case through an alternative dispute resolution mechanism called "conclusive agreement" submitted before PRODECON (Mexican Tax Ombudsman) with the MFM through working meetings attended by representatives of the MFM, CDM and requested the adoption of a conclusive agreement before the PRODECON (Local Tax Ombudsman) so that a full discussion of the. However, we were unable to materially resolve our case between us,with the MFM andthrough the PRODECON as appropriate, can leadprocess.
As a result, in April 2019, the MFM issued a final tax assessment to CDM (the “2011 Assessment”) totaling approximately $2.2 billion Mexican pesos (approx. $109.0 million USD at July 31, 2021) related to Income Tax, Flat Rate Business Tax and Value Added Tax, corresponding to the fiscal year 2011 tax audit. We filed an Administrative Appeal challenging the MFM’s 2011 Assessment on June 12, 2019. The filing of an administrative appeal in Mexico is a process in which the taxpayer appeals to a reconsiderationdifferent office within the Mexican tax authorities, forcing the legal office within the MFM to rule on the matter. This process preserves the taxpayer’s right to litigate in tax court if the Administrative Appeal process ends without a favorable or just resolution.
In February 2021, the legal division of the MFM findings. During our third and fourth fiscal quarters of 2017, several meetings between MFM, PRODECON and us took place and on November 28, 2017,issued a resolution in which the PRODECON process concluded.2011 Assessment was revoked. As a result, the legal division ordered the MFM is expected to issue a new tax assessment, taking into consideration arguments made by the Company in its filing of the administrative appeal.
On June 16, 2021, Calavo reached a settlement agreement with the MFM regarding the 2011 Assessment. Under the terms of the settlement, Calavo agreed to pay approximately $47.8 million Mexican pesos (approximately $2.4 million USD) as a full and final assessment during or beforesettlement of all taxes, fines and penalties asserted by the endMFM. The settlement included $1.5 million USD of our 2018 fiscal third quarter. Ifincome taxes and $0.9 million USD of Value Added Taxes, with both amounts including penalties and interest and inflationary adjustments, which have been recorded in the MFM’s final assessment does not differ materially from their preliminary observations, then we will resolveaccompanying financial statements as a discreet item in Income Tax Provision, and in Expenses related to Mexican tax matters, respectively. An additional $0.3 million USD of related professional fees have also been recorded as expenses related to the matter throughMexican tax matters.
15
legal means. We believe we have the legal arguments and documentation to sustain the positions challenged by tax authorities.2013 Assessment
Additionally, we also received notice from Mexico's Federal Tax Administration Service, Servicio de Administracion Tributaria (SAT), that our wholly-owned Mexican subsidiary, Calavo de Mexico, is currently under examination related to fiscal year 2013. In January 2017, we received preliminary observations from SAT Servicio de Administracion Tributaria in Mexico (the “SAT”) related to an audit for fiscal year 2013 outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and VAT.IVA. We provided a written rebuttal to these preliminary observationobservations during our second fiscal quarter of 2017, which2017. During the SAT is in process of analyzing. Duringperiod from our third fiscal quarter of 2017 we requested the adoption of a conclusive agreement before the PRODECON (Local Tax Ombudsman), so that a full discussion of the case between us, the SAT and the PRODECON, as appropriate, can lead to a reconsideration of the SATs findings. Duringthrough our firstthird fiscal quarter of 2018, we attempted to resolve our case with the SAT through the conclusive agreement submitted before PRODECON, having several working meetings attended by representatives of the SAT, CDM and the PRODECON. However, we were unable to materially resolve our case with the SAT through the PRODECON process.
As a result, in July 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $2.6 billion Mexican pesos (which includes annual adjustments for inflation, and equals approx. $128.8 million USD at July 31, 2021) related to Income Tax, Flat Rate Business Tax, and Value Added Tax, related to this fiscal 2013 tax audit. This amount has been adjusted for inflation as of July 31, 2021 to the amount of $3 billion Mexican pesos (approx. $150 million USD). Additionally, the tax authorities have determined that we owe our employee’s profit-sharing liability, totaling approximately $118 million Mexican pesos (approx. $5.8 million USD at July 31, 2021).
We have consulted with both an internationally recognized tax advisor as well as a global law firm with offices throughout Mexico, and we continue to believe that this tax assessment is without merit. In August 2018, we filed an Administrative Appeal on the 2013 Assessment, appealing our case to the SAT’s central legal department in Michoacan. Furthermore, in August 2018, we received a favorable ruling from the SAT’s central legal department in Michoacan on another tax matter (see footnote 11 regarding IVA refunds) indicating that they believe that our legal interpretation is accurate on a matter that is also central to the 2013 Assessment. We believe this recent ruling significantly undermines the 2013 Assessment.
On June 25, 2021, we became aware that the Administrative Appeal had an initial meetingbeen resolved by the SAT against CDM on March 12, 2021, and that we had allegedly failed to timely respond to and challenge the SAT’s notification of such resolution, therefore rendering the 2013 Assessment as definitive. Based on legal counsel from our tax advisory firm, we and our tax advisory firm have concluded that the March notification was not legally communicated. In addition, the SAT has placed liens on the fixed assets of CDM, with officials froma net book value of approximately $26 million USD, and on bank accounts of CDM totaling approximately $1 million USD in order to guaranty the 2013 Assessment. For reasons explained below, we do not believe that these liens pose a risk to the ongoing business operations of CDM.
We strongly disagree with above actions taken and conclusions reached by the SAT, and have since taken the PRODECON, which led to a further exchangefollowing measures in vigorous defense of supporting information and documentation. We expect that several formal meetings between us, the SAT and the PRODECON will be required before the SAT will reach a conclusion. Note that during the meeting and discussion process, the fiscal year 2013 final assessment (previously expected no later September 2017) has been suspended.our position:
● | Retained a global law firm with offices throughout Mexico to provide legal representation before the SAT, as well as retained the legal division of an internationally recognized tax advisor, to provide legal representation before the Federal Tax Court. |
● | On August 17, we filed a writ with the SAT requesting a substitution of a financial bond for the above-mentioned liens. |
● | On August 18, we filed an Administrative Reconsideration (the Reconsideration) before the Central Legal Department of the SAT located in Mexico City, asserting that the resolution in March of the Administrative Appeal was wrongly concluded, in particular with respect to the following matters: |
o | Failure to recognize CDM as a “maquiladora” |
o | Considering the Company to have a permanent establishment in Mexico, |
o | Including fruit purchase deposits transferred by the Company to CDM as taxable, |
o | Application of 16% IVA tax to fruit purchase deposits |
o | Imposing double-taxation on the fruit purchase transactions |
● | On August 27, we filed a formal complaint, or queja, (the Complaint) before the PRODECON to request their assistance with having the SAT act upon the Reconsideration. It should be noted that although the SAT |
16
is not obligated to act upon the Reconsideration, we believe that the PRODECON Complaint makes it likely that the SAT will respond to the Administrative Reconsideration and be open to settlement discussions. |
● | On August 20, we filed an Annulment Suit (the Suit) with the Federal Tax Court, which among other things, strongly contends that the notifications made by the SAT to CDM and its designated advisors of the resolution of the Administrative Appeal in March were not legally communicated. In addition, the Suit asserts the same matters central to the Reconsideration, as described above, as wrongly concluded in the resolution of the Administrative Appeal. |
We believe that the ultimate resolutionSuit will be accepted by the Tax Court, which will render the 2013 Assessment as non-definitive, and which will allow CDM to petition the Tax Court for a halt to any collection procedures by the SAT and a substitution of these mattersa bond for any liens placed on CDM assets.
While we continue to believe that the 2013 Assessment is unlikelycompletely without merit, and that we will prevail on the Suit in the Tax Court, we also believe it is in the best interest of CDM and the Company to settle the 2013 Assessment as quickly as possible. Furthermore, we believe that the above actions taken by CDM will encourage the SAT agree to reach a settlement. In accordance with our cumulative probability analysis, based on factors such as recent settlements made by the SAT in other cases, the 2011 Assessment settlement reached by CDM with the MFM, and the value of CDM assets, we have recorded a material effect on our consolidatedprovision of $11 million USD in the accompanying financial position, resultsstatements as a discrete item in Income Tax Provision. The provision includes estimated penalties, interest and inflationary adjustments. We incurred $0.1 million USD of operations and cash flows.related professional fees, which have been recorded in Expenses related to Mexican Tax matters.
8. | Fair value measurements |
8.Fair value measurements
A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).
The following table sets forth our financial assets and liabilities as of JanuaryJuly 31, 20182021 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 at July 31, 2021: | | | | | | | | | | | | | |
Investment in Limoneira Company(1) | | $ | 30,040 |
| | - |
| | - | | $ | 30,040 | |
Total assets at fair value | | $ | 30,040 | | | - | | | - | | $ | 30,040 | |
| | | | | | | | | | | | | |
Assets at Fair Value at October 31, 2020: | | | | | | | | | | | | | |
Investment in Limoneira Company(1) | | $ | 23,197 |
| | - |
| | - | | $ | 23,197 | |
Total assets at fair value | | $ | 23,197 | | | - | | | - | | $ | 23,197 | |
| | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
|
| (All amounts are presented in thousands) |
| ||||||||||
Assets at Fair Value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Limoneira Company(1) |
| $ | 37,251 |
|
| - |
|
| - |
| $ | 37,251 |
|
Total assets at fair value |
| $ | 37,251 |
|
| - |
|
| - |
| $ | 37,251 |
|
(1) The investment in Limoneira Company consists of marketable securities in the Limoneira Company common stock. We currently own approximately 12%9% of Limoneira’s outstanding common stock. These securities are measured at fair value byusing quoted market prices. Limoneira’s stock price at January 31, 2018 and October 31, 2017 equaled $21.55 per share and $23.35 per share. Unrealized gains and losses are recognized through other comprehensive income. Unrealized investment holding losses arising duringFor the three months ended JanuaryJuly 31, 20182021 and 2017 was $3.12020, we recognized losses of $0.3 million and $4.7 million.gains of $0.2 million on the consolidated condensed statement of operations. For the nine months ended July 31, 2021 and 2020, we recognized gains of $6.8 million and losses of $9.1 million on the consolidated condensed statement of operations.
1617
9. | Noncontrolling interest |
9.Noncontrolling interest
The following table reconciles shareholders’ equity attributable to noncontrolling interest related to Avocados de Jalisco (in thousands).
| | | | | | | |
|
| Three months ended July 31, |
| ||||
Avocados de Jalisco noncontrolling interest |
| 2021 |
| 2020 | | ||
| | | |
| | | |
Noncontrolling interest, beginning | | $ | 1,385 | | $ | 1,496 | |
Net income attributable to noncontrolling interest of Avocados de Jalisco | |
| 66 | |
| 64 | |
Noncontrolling interest, ending | | $ | 1,451 | | $ | 1,560 | |
| | | | | | | |
|
| | | |
| ||
| | Nine months ended July 31, | | ||||
Avocados de Jalisco noncontrolling interest |
| 2021 |
| 2020 | | ||
| | | |
| | | |
Noncontrolling interest, beginning | | $ | 1,472 | | $ | 1,688 | |
Net loss attributable to noncontrolling interest of Avocados de Jalisco | |
| (21) | |
| (128) | |
Noncontrolling interest, ending | | $ | 1,451 | | $ | 1,560 | |
10. | Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
| Three months January 31, |
|
| Three months January 31, |
|
Avocados de Jalisco noncontrolling interest |
| 2018 |
| 2017 |
| ||
|
|
|
|
|
|
|
|
Noncontrolling interest, beginning |
| $ | 1,016 |
| $ | 962 |
|
Noncash transfer of noncontrolling interest |
|
| 1,001 |
|
| — |
|
Net loss attributable to noncontrolling interest of Avocados de Jalisco |
|
| (150) |
|
| (28) |
|
Noncontrolling interest, ending |
| $ | 1,867 |
| $ | 934 |
|
10.Earnings per share
Basic and diluted net income per share is calculated as follows (data in thousands, except per share data):
|
|
|
|
|
|
|
|
| Three months ended January 31, | ||||
|
| 2018 |
| 2017 | ||
Numerator: |
|
|
|
|
|
|
Net Income attributable to Calavo Growers, Inc. |
| $ | 7,139 |
| $ | 5,249 |
Denominator: |
|
|
|
|
|
|
Weighted average shares - Basic |
|
| 17,446 |
|
| 17,374 |
Effect on dilutive securities – Restricted stock/options |
|
| 79 |
|
| 56 |
Weighted average shares - Diluted |
|
| 17,525 |
|
| 17,430 |
Net income per share attributable to Calavo Growers, Inc: |
|
|
|
|
|
|
Basic |
| $ | 0.41 |
| $ | 0.30 |
Diluted |
| $ | 0.41 |
| $ | 0.30 |
| | | | | | |
| | | Three months ended July 31, | |||
|
| 2021 |
| 2020 | ||
Numerator: | | | | | | |
Net loss attributable to Calavo Growers, Inc. | | $ | (12,981) | | $ | (15,636) |
Denominator: | | | | | | |
Weighted average shares – Basic | |
| 17,630 | |
| 17,586 |
Effect of dilutive securities – Restricted stock/options | |
| — | |
| — |
Weighted average shares – Diluted | |
| 17,630 | |
| 17,586 |
Net loss per share attributable to Calavo Growers, Inc: | | | | | | |
Basic | | $ | (0.74) | | $ | (0.89) |
Diluted | | $ | (0.74) | | $ | (0.89) |
| | | | | | |
| | Nine months ended July 31, | ||||
|
| 2021 |
| 2020 | ||
Numerator: | | | | | | |
Net Income (loss) attributable to Calavo Growers, Inc. | | $ | 1,137 | | $ | (19,852) |
Denominator: | | | | | | |
Weighted average shares - Basic | |
| 17,616 | |
| 17,558 |
Effect on dilutive securities – Restricted stock/options | |
| 53 | |
| — |
Weighted average shares - Diluted | |
| 17,669 | |
| 17,558 |
Net income (loss) per share attributable to Calavo Growers, Inc: | | | | | | |
Basic | | $ | 0.06 | | $ | (1.13) |
Diluted | | $ | 0.06 | | $ | (1.13) |
11. | Mexican IVA taxes receivable |
11.Mexican IVA taxes receivable
Included in other assets are tax receivables due from the Mexican government for value-added taxes (IVA) paid in advance. CDM is charged IVA by vendors on certain expenditures in Mexico, which, insofar as they relate to the exportation of goods, translate into IVA amounts receivablerecoverable from the Mexican government.
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As of JanuaryJuly 31, 20182021, and October 31, 2017,2020, CDM IVA receivables totaled $21.2$37.0 million (733.8 million Mexican pesos) and $19.5 million.$30.2 million (640.7 million Mexican pesos). Historically, CDM received IVA refund payments from the Mexican tax authorities on a timely basis. Beginning in fiscal 2014 and continuing into fiscal 2018,2021, however, the tax authorities began carrying out more detailed reviews of our refund requests and our supporting documentation. Additionally, they are also questioning the refunds requested attributable to IVA paid to certain suppliers that allegedly did not fulfill their own tax obligations. We believe these factors and others have contributed to delays in the processing of IVA claims by the Mexican tax authorities. Currently, we are in the process of collecting such balances primarily through regular administrative processes, but certainthese amounts may ultimately need to be recovered viathrough Administrative Appeals and/or legal means.
During the first quarter of fiscal 2017, the tax authorities informed us that their internal opinion, based on the information provided by the local SAT office, in Uruapan, considers that CDM is not properly documented relative to its declared tax structure and therefore CDM cannot claim the refundable IVA balance. CDM has strong arguments and supporting documentation to sustain its declared tax structure for IVA and income tax purposes. CDM decided to startstarted an administrative appealAdministrative Appeal for the IVA related to the request of the months of July, August and September of 2015 (the “2015 Appeal”) in order to assert its argument that CDM is properly documented and to therefore change the SAT’s internal assessment. CDM
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expectsits declared tax structure is indeed accurate. While favorable on this central matter of CDM’s declared tax structure, the ruling, however, still does not recognize the taxpayers right to have a full refund for the IVA related to the months of July, August and September 2015. Therefore, in October 2018, CDM filed a substance-over-form Annulment Suit in the Federal Tax Court to recover its full refund for IVA over the subject period, which is currently pending resolution.
In spite of the favorable ruling from the SAT’s Legal Administration in Michoacan, as discussed above, the local SAT office continues to believe that CDM is not properly documented relative to its declared tax structure. As a result, they believe CDM cannot claim certain refundable IVA balances, specifically regarding our IVA refunds related to January through December of 2013, 2014, and 2015, and January and February of 2017. CDM has strong arguments and supporting documentation to sustain its declared tax structure for IVA and income tax purposes. With assistance from our internationally recognized tax advisory firm, as of July 31, 2021, CDM has filed (or has plans to file) Administrative Appeals for the IVA related to the preceding months. A response to these Administrative Appeals is currently pending resolution.
In light of the foregoing, the Company is currently considering its options for resolution of the VAT receivables. In the unlikely event of an unfavorable resolution of the Administrative Appeals, we plan to this matterfile Annulment Suits with the Mexican Federal Tax Court. If these suits result in fiscal 2018. Asan unfavorable ruling, there is an option to appeal to the Collegiate Circuit Court. The estimated time for the resolution of January 31, 2018these suits could be 2 – 3 years. This estimated time could be impacted and October 31, 2017, $19.8 million and $18.2 milliondelayed by the situation of CDM IVA receivables were recorded in other assets.the COVID-19 pandemic.
We believe that our operations in Mexico are properly documenteddocumented. Furthermore, our internationally recognized tax advisors believe that there are legal grounds to prevail in the Federal Tax Court and that therefore, the Mexican tax authorities will ultimately authorize the refund of the corresponding IVA amounts.
12. FreshRealm Separation
On February 3, 2021, Calavo and FreshRealm entered into a Limited Liability Company Member Separation and Release Agreement (the “Separation Agreement”) described below.
Calavo was previously a limited liability company member in FreshRealm and was a party to that certain FreshRealm, LLC Seventh Amended and Restated Limited Liability Company Agreement, dated as of February 27, 2019, by and among FreshRealm and its members. Calavo and FreshRealm were also parties to that certain Sixth Amended and Restated Senior Promissory Note, effective August 10, 2018, as amended (the “Prior Note”), pursuant to which Calavo loaned to FreshRealm principal plus accrued interest in the total sum of $34.5 million. We willrecorded a reserve of $34.5 million on this balance in the third quarter of fiscal 2020.
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Pursuant to the Separation Agreement, among other terms: (i) Calavo terminated its limited liability company interest and equity ownership in FreshRealm; (ii) Calavo and FreshRealm simultaneously entered into an Amended and Restated Senior Secured Loan Agreement and Promissory Note (the “Amended Note”), which amended and restated the Prior Note; (iii) FreshRealm issued an additional Secured Promissory Note to Calavo in the amount of approximately $5 million that is subordinated to the Amended Note (the “Second Note”, together with the Amended Note, the “Notes”); (iv) in the event FreshRealm paid Calavo the sum of $6 million (the “Loan Payoff Amount”) by March 31, 2022 (the “Loan Payoff Period”), the Notes shall be deemed paid in full; (v) the parties agreed to a mutual release of any claims; and (vi) the parties agreed to indemnify each other from any subsequent third party claims.
In July 2021, FreshRealm paid Calavo the Loan Payoff Amount of $6.0 million, and we recorded the receipt as a recovery of the reserve for collectability of the FreshRealm note receivable on the statement of operations. Therefore, the Notes mentioned above, have been deemed paid in full. If FreshRealm undergoes a sale of its business either through a merger or a majority sale of its assets or equity interests before February 3, 2022, FreshRealm must pay Calavo twenty percent (20%) of the purchase price proceeds from such sale of FreshRealm.
If FreshRealm (i) undergoes a “Success Event” in the future, including: a merger, a majority sale of FreshRealm’s assets or equity ownership interests, a private placement (greater than $35 million), or an initial public offering where FreshRealm as a company is valued at $100 million or more, FreshRealm must pay to the Company additional compensation in accordance with the following:
● | FreshRealm must pay Calavo a $10 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $100 million, but less than $230 million; |
● | FreshRealm must pay Calavo a $20 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $230 million, but less than $380 million; or |
● | FreshRealm must pay Calavo a $34 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $380 Million. |
No Amounts have been recorded on the balance sheet as of July 31, 2021, with respect to a sale or success event.
13. Credit Facility
On January 29, 2021, we entered into the Third Amendment to Credit Agreement (the “Third Amendment”) with Farm Credit West, PCA and Bank of America, N.A. relating to our Credit Agreement dated as of June 14, 2016, First Amendment to Credit Agreement dated as of August 29, 2016, and Second Amendment to Credit Agreement dated as of February 28, 2019 (collectively, the “Credit Facility”). This Third Amendment, among other things, provides for a five-year extension of the maturity date to January 29, 2026, a $20 million increase in the revolving commitment to $100 million (from $80 million) (for a total facility size of $150 million if the $50 million accordion is exercised, up from a total size of $130 million), and a 25 basis point increase in the interest rate. The new interest rate schedules are effective mid-June 2021. The weighted-average interest rate under the Credit Facility was 2.9% and 1.9% at July 31, 2021 and October 31, 2020. Under the Credit Facility, we had $36.0 million and $20.6 million outstanding as of July 31, 2021 and October 31, 2020. In accordance with the extended due date, the outstanding balance of the Credit Facility has been classified as long-term in the accompanying balance sheet as of July 31, 2021.
The Credit Facility agreement contains customary affirmative and negative covenants for agreements of this type, including the following financial covenants applicable to the Company and its subsidiaries on a consolidated basis: (a) a quarterly consolidated leverage ratio of not more than 2.50 to 1.00 and (b) a quarterly consolidated fixed charge coverage ratio of not less than 1.15 to 1.00. We were in compliance with all financial covenants at July 31, 2021.
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14. COVID-19 Pandemic Impact
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The COVID-19 pandemic has created challenging and unprecedented conditions for our business, and we are committed to taking action in support of a Company-wide response to the crisis. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. We believe we are well-positioned for the future as we continue to navigate the crisis and prepare for an eventual return to a more normal operating environment. We have successfully implemented contingency plans in the U.S. and in Mexico to monitor the collectionevolving needs of these receivables with our outside consultants.businesses in those countries, as well as those related to our Peru partner in consignment avocado sales.
12. Income Taxes
Our tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. We recognize theThe effects of tax legislationthe pandemic have been more pronounced in the period inportions of our business servicing foodservice customers and to a lesser extent certain segments of our retail business, including behind-the-glass deli and grab-and-go convenience items.
In early 2021, health agencies approved vaccines for combating the COVID-19 virus. However, actual vaccination results are ultimately dependent on, among other factors, vaccine availability and their acceptance by individuals which the law is enacted. Our deferred tax assets and liabilities are remeasured using enacted tax rates expecteddifficult to apply to taxable income in the years we estimate the related temporary differences to reverse.
On December 22, 2017, the President of the United States signed and enacted comprehensive tax legislation into law H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). Except for certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer with an October 31 fiscal year end, the majority of the new provisions, such as eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income and introducing new limitations on certain business deductions, will not apply until our 2019 fiscal year. For fiscal 2018 and effective in the first fiscal quarter, the most significant impacts include: lowering of the U.S. federal corporate income tax rate; remeasuring certain net deferred tax assets and liabilities; and requiring the transition tax on the deemed repatriation of certain foreign earnings.predict. In the firstthird quarter of fiscal 2018, we recorded $1.7 million2021, the delta variant of the SARS-COV-2 virus became the dominant strain in one-time, non-cash charges relatedthe U.S. and elsewhere and led to various pandemic restrictions being reinstated. Accordingly, the revaluationpace of the recovery from the COVID-19 pandemic is not presently known. We cannot reasonably estimate the duration or extent of the pandemic’s adverse impact on our net deferred tax assets (approx. $1.4 million)business, operating results, and long-term liquidity position.
The recovery from the COVID-19 pandemic and the transition tax on the deemed repatriation of foreign earnings (approx. $0.3 million). For fiscal year 2018 wecurrent economic climate is increasing labor costs, commodity costs and logistical costs. We are estimating an effective rate of 26.0% based primarily on the blending of the historical federal corporate tax rate of 35%experiencing operational challenges that impact our production facilities and the new federal corporate income tax rate of 21%.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) allowing taxpayers to record a reasonable estimate ofour logistics network; the impact of prices for petroleum-based products, packaging materials and commodity costs; and the U.S. legislation when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the estimated income tax chargeavailability of $1.7 million represents the Company’s best estimate based on interpretation of the U.S. legislation. As a result, the actual impact on the net deferred tax liability may vary from the estimated amount due to uncertainties in the Company’s preliminary review.sufficient labor is increasing costs companywide.
13. Thomas Fire
We have multiple facilities located in Santa Paula, California, most notably our corporate headquarters. None of our facilities sustained damage from the Thomas fire in California (which began and ended during our first fiscal quarter) and disruption to our operations was minimal. We do not expect the fires in Ventura County to have a significant impact on our overall avocado volumes or earnings. We expect to manage through any shortfall in the Ventura County avocado supply through our diversified avocado sourcing.
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ITEM 2.MANAGEMENT'S DISCUSSION2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the fiscal year ended October 31, 20172020 of Calavo Growers, Inc. (we, Calavo,(“we”, “Calavo”, or the Company)“Company”).
Recent Developments
COVID-19 Pandemic Impact
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The COVID-19 pandemic has created challenging and unprecedented conditions for our business, and we are committed to taking action in support of a Company-wide response to the crisis. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. We believe we are well-positioned for the future as we continue to navigate the crisis and prepare for an eventual return to a more normal operating environment. We have successfully implemented contingency plans in the U.S. and in Mexico to monitor the evolving needs of our businesses in those countries, as well as those related to our Peru partner in consignment avocado sales.
The effects of the pandemic have been more pronounced in the portions of our business servicing foodservice customers and to a lesser extent certain segments of our retail business, including behind-the-glass deli and grab-and-go convenience items.
In early 2021, health agencies approved vaccines for combating the COVID-19 virus. However, actual vaccination results are ultimately dependent on, among other factors, vaccine availability and their acceptance by individuals which are difficult to predict. In the third quarter of fiscal 2021, the delta variant of the SARS-COV-2 virus became the dominant strain in the U.S. and elsewhere and led to various pandemic restrictions being reinstated. Accordingly, the pace of the recovery from the COVID-19 pandemic is not presently known. We cannot reasonably estimate the duration or extent of the pandemic’s adverse impact on our business, operating results, and long-term liquidity position.
COVID-19 Recovery Economic Impact
The recovery from the COVID-19 pandemic and the current economic climate is increasing labor costs, commodity costs and logistical costs. We are experiencing operational challenges that impact our production facilities and our logistics network; the impact of prices for petroleum-based products, packaging materials and commodity costs; and the availability of sufficient labor is increasing costs companywide.
Beginning in the third quarter of fiscal 2021, in response to the inflationary costs described above, we began to notify our customers of our plans to institute price increases for our RFG and Foods products. Management believes the price increases will largely be accepted by our customers without significant loss of sales, will reverse the margin compression experienced by RFG and Foods segments during the pandemic, and will enable us to continue to invest in initiatives that drive growth.
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Dividend payment
On December 8, 2017,4, 2020, we paid a $0.95$1.15 per share dividend in the aggregate amount of $16.7$20.3 million to shareholders of record on November 17, 2017.13, 2020.
Litigation
The Thomas fire
We have multiple facilities located in Santa Paula, California, most notably our corporate headquarters. None of our facilities sustained damage from the Thomas fire in California (which began and ended during our first fiscal quarter) and disruption to our operations was minimal. We do not expect the fires in Ventura County to have a significant impact on our overall avocado volumes or earnings. We expect to manage through any shortfall in the Ventura County avocado supply through our diversified avocado sourcing.
Litigation
We are currently a named defendant in two class action lawsuits filed in Superior state courts in California alleging violations of California wage-and-hour laws, failure to pay overtime, failure to pay for missed meal and rest periods, failure to provide accurate itemized wage statements, failure to pay all wages due at the time of termination or resignation, as well as statutory penalties for violation of the California Labor Code and Minimum Wage Order-2014.
In August 2017, the parties reached a tentative settlement of the case, whereby we agreed to pay $0.4 million to resolve the allegations and avoid further distraction that would result if the litigation continued. The settlement is subject to court approval. The Company recorded $0.4 million as a selling, general and administrative expense in the third quarter of fiscal 2017. Though we are still awaiting court approval of the aforementioned settlement agreement, we believe this process will conclude in fiscal 2018, with no significant change in expense.
From time to time, we are also involved in other litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.
Mexico tax audits
We conduct business both domestically and internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in the normal course of business, we are subject to examination by taxing authorities, primarily in Mexico and the United States.
2011 Assessment
During our third quarter of fiscal 2016, our wholly-owned subsidiary, Calavo de Mexico (“CDM”)(CDM), received a written communication from the Ministry of Finance and Administration of the government of the State of Michoacan, Mexico (“MFM”)(MFM) containing preliminary observations related to a fiscal 2011 tax audit of such subsidiary. MFM’s preliminary observations outline certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and Value Added Tax (“VAT”)(IVA). During the period from our fourth fiscal quarter of 2016 through our first fiscal quarter of 2019, we provided a written rebuttalattempted to MFM’s preliminary observationsresolve our case through an alternative dispute resolution mechanism called "conclusive agreement" submitted before PRODECON (Mexican Tax Ombudsman) with the MFM through working meetings attended by representatives of the MFM, CDM and requested the adoption of a conclusive agreement before the PRODECON (Local Tax Ombudsman) so that a full discussion of the. However, we were unable to materially resolve our case between us,with the MFM andthrough the PRODECON as appropriate, can leadprocess.
As a result, in April 2019, the MFM issued a final tax assessment to CDM (the “2011 Assessment”) totaling approximately $2.2 billion Mexican pesos (approx. $109.0 million USD at July 31, 2021) related to Income Tax, Flat Rate Business Tax and Value Added Tax, corresponding to the fiscal year 2011 tax audit. We filed an Administrative Appeal challenging the MFM’s 2011 Assessment on June 12, 2019. The filing of an administrative appeal in Mexico is a process in which the taxpayer appeals to a reconsiderationdifferent office within the Mexican tax authorities, forcing the legal office within the MFM to rule on the matter. This process preserves the taxpayer’s right to litigate in tax court if the Administrative Appeal process ends without a favorable or just resolution.
In February 2021, the legal division of the MFM findings. During our third and fourth fiscal quarters of 2017, several meetings between
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MFM, PRODECON and us took place and on November 28, 2017,issued a resolution in which the PRODECON process concluded.2011 Assessment was revoked. As a result, the legal division ordered the MFM is expected to issue a new tax assessment, taking into consideration arguments made by the Company in its filing of the administrative appeal.
On June 16, 2021, Calavo reached a settlement agreement with the MFM regarding the 2011 Assessment. Under the terms of the settlement, Calavo agreed to pay approximately $47.8 million Mexican pesos (approximately $2.4 million USD) as a full and final assessment during or beforesettlement of all taxes, fines and penalties asserted by the endMFM. The settlement included $1.5 million USD of our 2018 fiscal third quarter. Ifincome taxes and $0.9 million USD of Value Added Taxes, with both amounts including penalties and interest and inflationary adjustments, which have been recorded in the MFM’s final assessment does not differ materially from their preliminary observations, then we will resolve the matter through legal means. We believe we have the legal argumentsaccompanying financial statements as a discreet item in Income Tax Provision, and documentation to sustain the positions challenged by tax authorities.
Additionally, we also received notice from Mexico's Federal Tax Administration Service, Servicio de Administracion Tributaria (SAT), that our wholly-owned Mexican subsidiary, Calavo de Mexico, is currently under examinationin Expenses related to fiscal year 2013. Mexican Tax matters, respectively. An additional $0.3 million USD of related professional fees have also been recorded as expenses related to the Mexican tax matters.
2013 Assessment
In January 2017, we received preliminary observations from SAT related to an audit for fiscal year 2013 outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and VAT.IVA. We provided a written rebuttal to these preliminary observationobservations during our second fiscal
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quarter of 2017, which2017. During the SAT is in process of analyzing. Duringperiod from our third fiscal quarter of 2017 we requested the adoption of a conclusive agreement before the PRODECON (Local Tax Ombudsman), so that a full discussion of the case between us, the SAT and the PRODECON, as appropriate, can lead to a reconsideration of the SATs findings. Duringthrough our firstthird fiscal quarter of 2018, we attempted to resolve our case with the SAT through the conclusive agreement submitted before PRODECON, having several working meetings attended by representatives of the SAT, CDM and the PRODECON. However, we were unable to materially resolve our case with the SAT through the PRODECON process.
As a result, in July 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $2.6 billion Mexican pesos (which includes annual adjustments for inflation, and equals approx. $128.8 million USD at July 31, 2021) related to Income Tax, Flat Rate Business Tax, and Value Added Tax, related to this fiscal 2013 tax audit. This amount has been adjusted for inflation as of July 31, 2021 to the amount of $3 billion Mexican pesos (approx. $150 million USD). Additionally, the tax authorities have determined that we owe our employee’s profit-sharing liability, totaling approximately $118 million Mexican pesos (approx. $5.8 million USD at July 31, 2021).
We have consulted with both an internationally recognized tax advisor as well as a global law firm with offices throughout Mexico, and we continue to believe that this tax assessment is without merit. In August 2018, we filed an Administrative Appeal on the 2013 Assessment, appealing our case to the SAT’s central legal department in Michoacan. Furthermore, in August 2018, we received a favorable ruling from the SAT’s central legal department in Michoacan on another tax matter (see footnote 11 regarding IVA refunds) indicating that they believe that our legal interpretation is accurate on a matter that is also central to the 2013 Assessment. We believe this recent ruling significantly undermines the 2013 Assessment.
On June 25, 2021, we became aware that the Administrative Appeal had an initial meetingbeen resolved by the SAT against CDM on March 12, 2021, and that we had allegedly failed to timely respond to and challenge the SAT’s notification of such resolution, therefore rendering the 2013 Assessment as definitive. Based on legal counsel from our tax advisory firm, we and our tax advisory firm have concluded that the March notification was not legally communicated. In addition, the SAT has placed liens on the fixed assets of CDM, with officials froma net book value of approximately $26 million USD, and on bank accounts of CDM totaling approximately $1 million USD in order to guaranty the 2013 Assessment. For reasons explained below, we do not believe that these liens pose a risk to the ongoing business operations of CDM.
We strongly disagree with above actions taken and conclusions reached by the SAT, and have since taken the PRODECON, which led to a further exchangefollowing measures in vigorous defense of supporting information and documentation. We expect that several formal meetings between us, the SAT and the PRODECON will be required before the SAT will reach a conclusion. Note that during the meeting and discussion process, the fiscal year 2013 final assessment (previously expected no later September 2017) has been suspended.our position:
● | Retained a global law firm with offices throughout Mexico to provide legal representation before the SAT, as well as retained the legal division of an internationally recognized tax advisor, to provide legal representation before the Federal Tax Court. |
● | On August 17, we filed a writ with the SAT requesting a substitution of a financial bond for the above-mentioned liens. |
● | On August 18, we filed an Administrative Reconsideration (the Reconsideration) before the Central Legal Department of the SAT located in Mexico City, asserting that the resolution in March of the Administrative Appeal was wrongly concluded, in particular with respect to the following matters: |
o | Failure to recognize CDM as a “maquiladora” |
o | Considering the Company to have a permanent establishment in Mexico, |
o | Including fruit purchase deposits transferred by the Company to CDM as taxable, |
o | Application of 16% IVA tax to fruit purchase deposits |
o | Imposing double-taxation on the fruit purchase transactions |
● | On August 27, we filed a formal complaint, or queja, (the Complaint) before the PRODECON to request their assistance with having the SAT act upon the Reconsideration. It should be noted that although the SAT is not obligated to act upon the Reconsideration, we believe that the PRODECON Complaint makes it likely that the SAT will respond to the Administrative Reconsideration and be open to settlement discussions. |
● | On August 20, we filed an Annulment Suit (the Suit) with the Federal Tax Court, which among other things, strongly contends that the notifications made by the SAT to CDM and its designated advisors of the resolution of the Administrative Appeal in March were not legally communicated. In addition, the Suit asserts the same matters central to the Reconsideration, as described above, as wrongly concluded in the resolution of the Administrative Appeal. |
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We believe that the ultimate resolutionSuit will be accepted by the Tax Court, which will render the 2013 Assessment as non-definitive, and which will allow CDM to petition the Tax Court for a halt to any collection procedures by the SAT and a substitution of a bond for any liens placed on CDM assets.
While we continue to believe that the 2013 Assessment is completely without merit, and that we will prevail on the Suit in the Tax Court, we also believe it is in the best interest of CDM and the Company to settle the 2013 Assessment as quickly as possible. Furthermore, we believe that the above actions taken by CDM will encourage the SAT agree to reach a settlement. In accordance with our cumulative probability analysis, based on factors such as recent settlements made by the SAT in other cases, the 2011 Assessment settlement reached by CDM with the MFM, and the value of CDM assets, we have recorded a provision of $11 million USD in the accompanying financial statements as a discrete item in Income Tax Provision. The provision includes estimated penalties, interest and inflationary adjustments. We incurred $0.1 million USD of related professional fees, which have been recorded in Expenses related to Mexican Tax matters.
FreshRealm Separation
On February 3, 2021, Calavo and FreshRealm entered into a Limited Liability Company Member Separation and Release Agreement (the “Separation Agreement”) described below.
Calavo was previously a limited liability company member in FreshRealm and was a party to that certain FreshRealm, LLC Seventh Amended and Restated Limited Liability Company Agreement, dated as of February 27, 2019, by and among FreshRealm and its members. Calavo and FreshRealm were also parties to that certain Sixth Amended and Restated Senior Promissory Note, effective August 10, 2018, as amended (the “Prior Note”), pursuant to which Calavo loaned to FreshRealm principal plus accrued interest in the total sum of $34.5 million. We recorded a reserve of $34.5 million on this balance in the third quarter of fiscal 2020.
Pursuant to the Separation Agreement, among other terms: (i) Calavo terminated its limited liability company interest and equity ownership in FreshRealm; (ii) Calavo and FreshRealm simultaneously entered into an Amended and Restated Senior Secured Loan Agreement and Promissory Note (the “Amended Note”), which amended and restated the Prior Note; (iii) FreshRealm issued an additional Secured Promissory Note to Calavo in the amount of approximately $5 million that is subordinated to the Amended Note (the “Second Note”, together with the Amended Note, the “Notes”); (iv) in the event FreshRealm paid Calavo the sum of $6 million (the “Loan Payoff Amount”) by March 31, 2022 (the “Loan Payoff Period”), the Notes shall be deemed paid in full; (v) the parties agreed to a mutual release of any claims; and (vi) the parties agreed to indemnify each other from any subsequent third party claims.
In July 2021, FreshRealm paid Calavo the Loan Payoff Amount of $6.0 million, and we recorded the receipt as a recovery of the reserve for collectability of the FreshRealm note receivable on the statement of operations. Therefore, the Notes mentioned above, have been deemed paid in full. If FreshRealm undergoes a sale of its business either through a merger or a majority sale of its assets or equity interests before February 3, 2022, FreshRealm must pay Calavo twenty percent (20%) of the purchase price proceeds from such sale of FreshRealm.
If FreshRealm (i) undergoes a “Success Event” in the future, including: a merger, a majority sale of FreshRealm’s assets or equity ownership interests, a private placement, or an initial public offering where FreshRealm as a company is valued at $100 million or more, FreshRealm must pay to the Company additional compensation in accordance with the following:
● | FreshRealm must pay Calavo a $10 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $100 million, but less than $230 million; |
● | FreshRealm must pay Calavo a $20 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $230 million, but less than $380 million; or |
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● | FreshRealm must pay Calavo a $34 million payment upon the closing of a Success Event if the valuation of FreshRealm at the time of the Success Event is equal to or greater than $380 Million. |
No Amounts have been recorded on the balance sheet as of July 31, 2021, with respect to a sale or success event.
Non-GAAP Financial Measures
The below tables include non-GAAP measures EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted EPS, which are not prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.”
EBITDA is defined as net income (loss) attributable to Calavo Growers, Inc. excluding (1) interest income and expense, (2) income taxes (benefit) provision, (3) depreciation and amortization and (4) stock-based compensation expense. Adjusted EBITDA is EBITDA with further adjustments for (1) non-cash net losses (income) recognized from unconsolidated entities, (2) goodwill impairment, (3) write-off of long-lived assets, (4) acquisition-related costs, (5) restructuring-related costs, including certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted EBITDA is a primary metric by which management evaluates the operating performance of the business, on which certain operating expenditures and internal budgets are based and by which, in addition to other factors, the Company’s senior management is compensated. The adjustments to calculate EBITDA and adjusted EBITDA are items recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded.
Adjusted net income is defined as net income (loss) attributable to Calavo Growers, Inc. excluding (1) non-cash net losses (income) recognized from unconsolidated entities, (2) goodwill impairment, (3) write-off of long-lived assets, (4) acquisition-related costs, (5) restructuring and restructuring-related costs, including certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted net income and the related measure of adjusted diluted EPS exclude certain items that are recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income affords investors a different view of the overall financial performance of the Company than adjusted EBITDA and the GAAP measure of net income (loss) attributable to Calavo Growers, Inc.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the financial tables below.
Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. One-time items are identified in the notes to the reconciliations in the financial tables below.
Non-GAAP information should be considered as supplemental in nature and not as a substitute for, or superior to, any measure of performance prepared in accordance with GAAP. None of these matters is unlikelymetrics are presented as measures of liquidity. The way the Company measures EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted EPS may not be comparable to havesimilarly titled measures presented by other companies and may not be identical to corresponding measures used in Company agreements.
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Adjusted Net Income (Non-GAAP, Unaudited)
The following table presents adjusted net income and adjusted diluted EPS, each a material effectnon-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., and Diluted EPS, which are the most directly comparable GAAP measures. See “Non-GAAP Financial Measures” above (in thousands, except per share amounts).
| | | | | | | | | | | | |
| | Three months ended July 31, |
| Nine months ended July 31, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net income (loss) attributable to Calavo Growers, Inc. | | $ | (12,981) | | $ | (15,636) | | $ | 1,137 | | $ | (19,852) |
Non-GAAP adjustments: | |
|
| |
|
| |
|
| |
|
|
Non-cash losses recognized from unconsolidated entities (a) | |
| 469 | |
| 1,170 | |
| 1,755 | |
| 6,375 |
Loss (Recovery) from FreshRealm (b) | |
| (6,000) | |
| 37,192 | |
| (6,130) | |
| 37,192 |
Certain management transition expenses (c) | |
| — | |
| — | |
| 685 | |
| 1,119 |
Acquisition costs (d) | |
| — | |
| — | |
| 262 | |
| 510 |
Net (gain) loss on Limoneira shares (e) | |
| 252 | |
| (218) | |
| (6,843) | |
| 9,125 |
RFG rent expense add back (f) | |
| 108 | |
| — | |
| 324 | |
| — |
Professional expenses related to FreshRealm | |
| — | |
| — | |
| 141 | |
| — |
Consulting expenses related to restructuring (g) | | | 125 | | | — | | | 125 | | | — |
Mexican tax matters (h) | | | 13,815 | | | — | | | 13,815 | | | — |
Tax impact of adjustments (i) | |
| 1,168 | |
| (9,596) | |
| 2,332 | |
| (13,762) |
Adjusted net income (loss) attributed to Calavo Growers, Inc. | | $ | (3,044) | | $ | 12,912 | | $ | 7,603 | | $ | 20,707 |
| | | | | | | | | | | | |
Calavo Growers, Inc.’s net income (loss) per share: | |
|
| |
|
| |
|
| |
|
|
Diluted EPS (GAAP) | | $ | (0.74) | | $ | (0.89) | | $ | 0.06 | | $ | (1.13) |
Adjusted Diluted EPS | | $ | (0.17) | | $ | 0.73 | | $ | 0.43 | | $ | 1.18 |
| | | | | | | | | | | | |
Number of shares used in per share computation: | |
|
| |
|
| |
|
| |
|
|
Diluted | |
| 17,630 | |
| 17,586 | |
| 17,669 | |
| 17,558 |
(a) | For the three and nine months ended July 31, 2021, we realized losses from Agricola Don Memo totaling $0.5 million and $1.8 million. For the three and nine months ended July 31, 2020, we realized income from Agricola Don Memo totaling $0.6 million and $0.9 million. For the three and nine months ended July 31, 2020, we recorded $1.8 million $7.2 million of non-cash losses from FreshRealm. |
(b) | In July 2021, as part of the FreshRealm Separation Agreement (See Note 12), FreshRealm paid Calavo the Loan Payoff Amount of $6.0 million, and we recorded the receipt on the statement of operations as a recovery of the reserve for collectability of the FreshRealm note receivable. During the third quarter of fiscal 2020, we recorded an impairment of 100% of our equity investment of $2.8 million, and we recorded a reserve for collectability of 100% of our note receivable of $34.2 million (which included accrued interest of $4.1 million), and $0.2 million in trade accounts receivable as of July 31, 2020, which resulted in a loss of $37.2 million. |
(c) | The nine months ended July 31, 2021 includes higher stock-based compensation for the early vesting of restricted stock for the retirement of our former Chief Executive Officer and Board member. The nine months ended July 31, 2020 includes higher stock-based compensation expense related to senior management transitions, which does not impact the underlying cost structure of the company. |
(d) | In the first quarter of 2021, we incurred professional service costs related to a considered but non-consummated acquisition. In the first quarter of 2020, we incurred transaction expenses related to the acquisition of SFFI Company, Inc. doing business as Simply Fresh Fruit. |
(e) | For the three and nine months ended July 31, 2021, we recorded $0.3 million in unrealized gains and $6.8 million in unrealized losses related to these mark-to-market adjustments. For the three and nine months ended July 31, 2020, we recorded $0.2 million in unrealized gains and $9.1 million in unrealized losses related to these mark-to-market adjustments. |
(f) | For the three and nine months ended July 31, 2021, we incurred $0.1 million and $0.3 million related to rent paid for RFG corporate office space that we have vacated and plan to sublease. |
27
(g) | For the three and nine months ended July 31, 2021, we recorded $0.1 million of consulting expenses related to an enterprise-wide strategic business operations study conducted by a third-party management consulting organization for the purpose of restructuring to improve the profitability of the organization and efficiency of its operations. |
(h) | In June 2021, we paid $2.4 million in full settlement of the 2011 Assessment. Of this amount, $1.5 million has been recorded as a discrete item in Income Tax Provision and $0.9 million is related to Value Added Tax expense and recorded as Expenses related to the Mexican tax matters. An additional $0.3 million of related professional fees have also been recorded as expenses related to the Mexican tax matters. See Note 7 to the consolidated financial statements included in this Quarterly Report for more information. |
In July 2021, based on our evaluation of the most probable outcomes of the 2013 Assessment, we have recorded an accrual of $11 million in the accompanying financial statements as a discrete item in Income Tax Provision. An additional $0.1 million of related professional fees have also been recorded as Expenses related to the Mexican tax matters. See Note 7 to the consolidated condensed financial positionstatements included in this Quarterly Report for further information.
(i) | Tax impact of non-GAAP adjustments are based on effective year-to-date tax rates. |
Reconciliation of EBITDA and Adjusted EBITDA (Non-GAAP, Unaudited)
The following table presents EBITDA and adjusted EBITDA, each a non-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., resultswhich is the most directly comparable GAAP measure. See “Non-GAAP Financial Measures” above (in thousands, except per share amounts).
| | | | | | | | | | | | |
|
| Three months ended July 31, |
| Nine months ended July 31, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Net income (loss) attributable to Calavo Growers, Inc. | | $ | (12,981) | | $ | (15,636) |
| $ | 1,137 | | $ | (19,852) |
Interest Income | | | 31 | | | (299) |
| | (58) | | | (1,933) |
Interest Expense |
| | 208 |
| | 203 | | | 573 |
| | 732 |
Provision (benefit) for Income Taxes (h) |
| | 12,358 |
| | (4,682) | | | 17,073 |
| | (6,540) |
Depreciation & Amortization |
| | 4,554 |
| | 4,204 | | | 12,925 |
| | 11,850 |
Stock-Based Compensation |
| | 554 |
| | 852 | | | 2,818 |
| | 3,569 |
EBITDA | | $ | 4,724 | | $ | (15,358) | | $ | 34,468 | | $ | (12,174) |
| | | | | | | | | | | | |
Adjustments: | |
|
| |
|
| |
|
| |
|
|
Non-cash losses recognized from unconsolidated entities (a) | |
| 469 | |
| 1,170 | |
| 1,755 | |
| 6,375 |
Net (gain) loss on Limoneira shares (e) | |
| 252 | |
| (218) | |
| (6,843) | |
| 9,125 |
Loss (Recovery) from FreshRealm (b) | |
| (6,000) | |
| 37,192 | |
| (6,130) | |
| 37,192 |
Professional expenses related to FreshRealm | |
| — | |
| — | |
| 141 | |
| — |
RFG rent expense add back (f) | |
| 108 | |
| — | |
| 324 | |
| — |
Acquisition costs (d) | |
| — | |
| — | |
| 262 | |
| 510 |
Consulting expenses related to restructuring (g) | | | 125 | | | — | | | 125 | | | — |
Expenses related to Mexican tax matters (h) | | | 1,342 | | | — | | | 1,342 | | | — |
Adjusted EBITDA | | $ | 1,020 | | $ | 22,786 | | $ | 25,444 | | $ | 41,028 |
Adjusted EBITDA per dilutive share | | $ | 0.06 | | $ | 1.30 | | $ | 1.44 | | $ | 2.34 |
See prior page for footnote references
28
Net Sales
The following table summarizes our net sales by business segment for each of the three and nine months ended JanuaryJuly 31, 20182021 and 2017:2020:
|
|
|
|
|
|
|
|
|
|
|
| Three months ended January 31, |
| ||||||
|
| 2018 |
| Change |
| 2017 |
| ||
|
|
|
|
|
|
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
Fresh products |
| $ | 122,785 |
| 9.6 | % | $ | 112,059 |
|
Calavo Foods |
|
| 19,037 |
| 13.4 | % |
| 16,788 |
|
RFG |
|
| 106,106 |
| 8.6 | % |
| 97,707 |
|
Total net sales |
| $ | 247,928 |
| 9.4 | % | $ | 226,554 |
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales: |
|
|
|
|
|
|
|
|
|
Fresh products |
|
| 49.5 | % |
|
|
| 49.5 | % |
Calavo Foods |
|
| 7.7 | % |
|
|
| 7.4 | % |
RFG |
|
| 42.8 | % |
|
|
| 43.1 | % |
|
|
| 100.0 | % |
|
|
| 100.0 | % |
| | | | | | | | | | | | | | | | | | |
| | Three months ended July 31, | | Nine months ended July 31, | | | ||||||||||||
| | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 | | | ||||
| | | | | | | | | | | | | | | | | | |
Gross sales: |
| |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
Fresh products | | $ | 161,580 | | (0) | % | $ | 162,139 | | $ | 438,725 | | (6) | % | $ | 466,197 | | |
RFG | |
| 103,786 | | 14 | % |
| 90,923 | |
| 290,380 | | (5) | % |
| 305,386 | | |
Calavo Foods | |
| 21,313 | | 12 | % |
| 18,967 | |
| 58,508 | | 2 | % |
| 57,304 | | |
Less intercompany eliminations | | | (1,671) | | 4 | % | | (1,604) | | | (5,206) | | 32 | % | | (3,946) | | |
Total net sales | | $ | 285,008 | | 5 | % | $ | 270,425 | | $ | 782,407 | | (5) | % | $ | 824,941 | | |
| | | | | | | | | | | | | | | | | | |
As a percentage of sales: | | | | | | | | | | | | | | | | | | |
Fresh products | |
| 56.4 | % | | |
| 59.6 | % |
| 55.7 | % | | |
| 56.2 | % | |
RFG | |
| 36.2 | % | | |
| 33.4 | % |
| 36.9 | % | | |
| 36.8 | % | |
Calavo Foods | |
| 7.4 | % | | |
| 7.0 | % |
| 7.4 | % | | |
| 6.9 | % | |
| |
| 100.0 | % | | |
| 100.0 | % |
| 100.0 | % | | |
| 100.0 | % | |
Summary
20
Summary
Net sales for the three months ended JanuaryJuly 31, 2018,2021, compared to the corresponding period in fiscal 2017,2020, increased by $21.4$14.6 million, or approximately 9.4%5%. The increase was due to an increase in the RFG and Calavo Foods segments, partially offset by a decline in the Fresh products segment. Net sales whenfor the nine months ended July 31, 2021, compared to the same corresponding prior year periods, is relatedperiod in fiscal 2020, decreased by $42.4 million, or approximately 5%. This decrease was due to growth from alldeclines across the Fresh products and RFG segments.
For the quarterthree months ended JanuaryJuly 31, 2018, our largest percentage increases2021, the decrease in sales was Calavo Foods, followed by our Fresh products segment and RFG segment, as shown above. The increase in Calavo Foodsproduct sales was due primarily to increaseda decline in sales of our prepared avocado products, which was partially offset by decreased sales of salsa products. The increasetomatoes. For the nine months ended July 31, 2021, the decrease in Fresh productsproduct sales during the first quarter of fiscal 2018, was due primarily to increaseddeclines in sales of avocados and tomatoes. TheFor the three months ended July 31, 2021, the increase in RFG sales was due primarily to increased sales from fresh prepared food, fresh-cut fruit & vegetables and vegetableprepared foods products. For the nine months ended July 31, 2021, the decrease in RFG sales was due primarily to decreased sales from fresh-cut fruit & vegetables and prepared foods products. For the three and nine months ended July 31, 2021, the increase in Calavo Foods was due primarily to a decrease in the sales of prepared avocado products. See discussion below for further details.
All three segments of our business are subject to seasonal trends which can impact the volume and/or quality of fruitraw materials sourced in any particular quarter. All intercompany sales are eliminated in our consolidated results of operations.
Fresh products
Three Months Ended July 31, 2021 vs. Three Months Ended July 31, 2020
First Quarter 2018 vs. First Quarter 2017
Net sales delivered byfor the Fresh products business increaseddecreased by approximately $10.7$0.6 million, or 9.6%less than 1%, for the firstthird quarter of fiscal 2018, when2021 compared to the samecorresponding period forin fiscal 2017. As discussed above, this increase2020. This decrease in Fresh product sales during the firstthird quarter of fiscal 20182021 was primarily related to increaseddecreased sales prices of avocados and tomatoes.tomatoes due to higher supply of tomatoes in the marketplace. Partially offsetting this decrease, was an increase in avocado sales.
Sales of tomatoes decreased $2.5 million, or 18%, for the third quarter of 2021, when compared to the prior year period. This decrease in tomato sales was primarily due to a 21% decrease in the average sales price per carton compared to the prior year period.
29
Sales of avocados increased $3.8$1.9 million, or 3.6%1%, for the firstthird quarter of 2018, when2021 compared to the sameprior year period. The average avocado sales price per carton increased 10% compared to the prior year period. This increase in the sales price per carton was mainly due to a decrease of supply of avocados in the marketplace. The volume of avocados sold in the third quarter of 2021 decreased 8% compared to the prior year period.
Nine Months Ended July 31, 2021 vs. Nine Months Ended July 31, 2020
Net sales for the Fresh products business decreased by approximately $27.5 million, or 6%, for the nine months ended July 31, 2021, compared to the corresponding period in fiscal 2020. This decrease was primarily related to decreased sales prices of avocados due to higher supply of avocados in the marketplace. In addition, tomato sales decreased due to a decline of tomato sales prices.
Sales of avocados decreased $15.9 million, or 4%, for the nine months ended July 31, 2021, compared to the prior year period. The average avocado sales price per carton decreased 5% compared to the prior year period. This decrease in the sales price per carton was mainly due to an increase of supply of avocados in the marketplace. The volume of avocados sold in the nine months ended July 31, 2021 increased 1% compared to the prior year period.
Sales of tomatoes decreased $12.2 million, or 26%, for the nine months ended July 31, 2021, compared to the prior year period. This decrease in tomato sales was primarily due to a 2.3 million pound, or 3%, increase24% decrease in the volumeaverage sales price per carton compared to the prior year period, in addition to a decrease of avocados3% of the number of tomato cartons sold duringdue to a delay in the quarter.start of the growing season.
Sales of tomatoes increased to $11.7 millionRFG
Three Months Ended July 31, 2021 vs. Three Months Ended July 31, 2020
Net sales for RFG for the first quarter of fiscal 2018,ended July 31, 2021, compared to $5.2the corresponding period in fiscal 2020, increased $12.9 million, for the same period for fiscal 2017.or 14%. The increase in sales for tomatoes iswas primarily due to an approximately 75% increaseadditional sales in regions where RFG has added manufacturing capacity.
Nine Months Ended July 31, 2021 vs. Nine Months Ended July 31, 2020
Net sales for RFG for the volumenine months end July 31, 2021, compared to the corresponding period in fiscal 2020, decreased $15.0 million, or 5%. The decrease was primarily due to lower sales out of cartons sold, as well as an increasethe Midwest, relating to the closure of RFG’s co-packing partner in that region, which occurred in April 2020. This was partially offset by additional sales in regions where RFG has added manufacturing capacity. Additionally, changing consumer demand and buying patterns related to COVID-19 adversely impacted RFG’s sales during the sales price per carton. nine months ended July 31, 2021.
Calavo Foods
First Quarter 2018Three Months Ended July 31, 2021 vs. First Quarter 2017Three Months Ended July 31, 2020
SalesNet sales for Calavo Foods for the quarter ended JanuaryJuly 31, 2018, when2021, compared to the samecorresponding period forin fiscal 2017,2020, increased $2.2$2.3 million, or 13.4%12%. Sales of prepared avocado products increased by approximately $2.5$2.4 million, or 15.6%13%, primarily related to an increase in the total volume of pounds sold.
Nine Months Ended July 31, 2021 vs. Nine Months Ended July 31, 2020
Net sales for Calavo Foods for the quarternine months ended JanuaryJuly 31, 2018, when2021, compared to the same prior yearcorresponding period in fiscal 2020, increased $1.2 million, or 2%. Sales of prepared avocado products increased by approximately $1.2 million, or 2%, primarily related to an increase in the sales price per pound. Partially offsetting this gainpound, partially offset by a decrease in pounds sold. Sales of prepared avocado products were sales of salsa products, which decreasedimpacted primarily by approximately $0.2 milliona decline in demand from foodservice customers related to COVID-19 during the quarter.
RFG
First Quarter 2018 vs. First Quarter 2017
Sales for RFG for the quarter ended January 31, 2018, when compared to the same period for fiscal 2017, increased $8.4 million, or 8.6%. The overall increase in sales is primarily due to higher sales volume from expanded retail partnerships across multiple geographies, including regions in which the Company has added production capacity.
year.
2130
Gross Profit
The following table summarizes our gross profit and gross profit percentages by business segment for the three and nine months ended JanuaryJuly 31, 20182021 and 2017:2020:
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended January 31, |
|
| ||||||
|
| 2018 |
| Change |
| 2017 |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
Fresh products |
| $ | 14,257 |
| 81.6 | % | $ | 7,851 |
|
|
Calavo Foods |
|
| 5,975 |
| 17.4 | % |
| 5,091 |
|
|
RFG |
|
| 6,078 |
| (32.3) | % |
| 8,982 |
|
|
Total gross profit |
| $ | 26,310 |
| 20.0 | % | $ | 21,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentages: |
|
|
|
|
|
|
|
|
|
|
Fresh products |
|
| 11.6 | % |
|
|
| 7.0 | % |
|
Calavo Foods |
|
| 31.4 | % |
|
|
| 30.3 | % |
|
RFG |
|
| 5.7 | % |
|
|
| 9.2 | % |
|
Consolidated |
|
| 10.6 | % |
|
|
| 9.7 | % |
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended July 31, | | Nine months ended July 31, | | | ||||||||||||
| | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 | | | ||||
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Gross Profit: |
| |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
Fresh products | | $ | 12,202 | | (31) | % | $ | 17,734 | | $ | 40,355 | | 4 | % | $ | 38,721 | | |
RFG | |
| (5,589) | | (169) | % |
| 8,055 | |
| (3,324) | | (124) | % |
| 13,666 | | |
Calavo Foods | |
| 1,254 | | (75) | % |
| 5,046 | |
| 11,275 | | (31) | % |
| 16,331 | | |
Total gross profit | | $ | 7,867 | | (74) | % | $ | 30,835 | | $ | 48,306 | | (30) | % | $ | 68,718 | | |
| | | | | | | | | | | | | | | | | | |
Gross profit percentages: | | | | | | | | | | | | | | | | | | |
Fresh products | |
| 7.6 | % | | |
| 10.9 | % |
| 9.2 | % | | |
| 8.3 | % | |
RFG | |
| (5.4) | % | | |
| 8.9 | % |
| (1.1) | % | | |
| 4.5 | % | |
Calavo Foods | |
| 5.9 | % | | |
| 26.6 | % |
| 19.3 | % | | |
| 28.5 | % | |
Consolidated | |
| 2.8 | % | | |
| 11.4 | % |
| 6.2 | % | | |
| 8.3 | % | |
Summary
Our cost of goods sold consists predominantly of ingredient costs (primarily fruit(fruit, vegetables and other whole foods)food products), packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products, and other direct expenses pertaining to products sold.
Gross profit increaseddecreased by approximately $4.4$23.0 million, or 20.0%74%, for the firstthird quarter of fiscal 2018, when2021 compared to the samecorresponding period forin fiscal 2017.2020. The increasedecrease was primarily attributable to gross profit increasesdeclines across all segments. Gross profit decreased by approximately $20.4 million, or 30%, for the Fresh products andnine months ended July 31, 2021, compared to the corresponding period in fiscal 2020. The decrease was primarily attributable to gross profit declines in the Calavo Foods and RFG segments, partially offset by a gross margin improvement in the Fresh products segment.
Fresh products
The decrease in our RFG segment.
Fresh products
During our three months segment gross profit percentage for the quarter ended JanuaryJuly 31, 2018, as2021, was the result of decreased gross profit for avocados. For the third quarter of fiscal 2021, the gross profit percentage for avocados was 7.5% compared to 11.0% for the third quarter of 2020. In fiscal 2021, we were unable to increase prices sufficiently to match increases in fruit costs. In addition, we experienced increased labor and freight costs, and less desirable fruit that negatively impacted gross margin for the Fresh products segment.
Gross profit for the quarter was also affected by the strengthening of the U.S. dollar in relation to the Mexican peso during the quarter, resulting in a $0.6 million net gain related the remeasurement of peso-dominated net assets at our Mexican subsidiaries. During the same priorperiod last year, period, thewe had a remeasurement gain of $1.4 million.
The increase in our Fresh products segment gross profit percentage for the nine months ended July 31, 2021 was the result of increased gross profit for avocados and tomatoes.avocados. For the first quarternine months ended JanuaryJuly 31, 2018, compared to the same prior year period,2021, the gross profit percentage for avocados increased to 11.7% in 2018 from 7.5% in 2017. The profit improvement during the first quarter of 2018 was primarily related to favorable year-over-year operating performance across our Mexican operations. In contrast, the U.S. Dollar to Mexican Peso exchange rate was weaker in first quarter 2018, when9.1% compared to 8.2% for the same prior year period. Gross profit benefited for the nine-month period by the strengthening of the U.S. dollar in relation to the Mexican peso during the nine months ended July 31, 2021, which resulted in a $1.1 million net gain related the remeasurement of peso-dominated net assets at our Mexican subsidiaries. During the same period last year, we had a remeasurement loss of $1.9 million.
Note that any additional significant fluctuations in the exchange rate between the U.S. Dollardollar and the Mexican Pesopeso may have a material impact on future gross profits for our Fresh products segment.
31
RFG
For
RFG’s gross profit (loss) percentage for the threequarter ended July 31, 2021 was (5.4)%, compared to 8.9% for the prior year period. RFG’s gross profit (loss) percentage for the nine months ended JanuaryJuly 31, 2018 we generated gross profit of $1.3 million from tomato sales, up from $0.1 million in2021 was (1.1)%, compared to 4.5% for the corresponding prior year period. The increasedeclines in tomato gross profit for the quarter and nine months ended July 31, 2021, were due to increased commodity costs, lack of availability of key commodities, lower supply and higher turnover of labor that caused increase overtime costs and decreased efficiencies, and extraordinary weather events. In addition, RFG’s gross profit (loss) was due primarilynegatively impacted by the decreased sales that resulted from the closure of our Midwest co-packing partner.
Lastly, in July 2021, we reserved $2.3 million as allowance for disputed accounts receivable from certain significant customers from the RFG segment that we deemed were uncollectible.
We continue to an approximately 75% increaseexperience operational challenges to our production facilities and logistics networks, shortage of labor and impacts from increases in prices of petroleum-based products, packaging materials and commodities, all of which are increasing costs companywide with the effects especially pronounced at RFG.
Beginning in the volumethird quarter of tomato cartons sold,fiscal 2021, in response to the inflationary costs described above, we began to notify our customers of our plans to institute price increases for our RFG and Foods products. Management believes the price increases will largely be accepted by our customers without significant loss of sales, will reverse the margin compression experienced by RFG and Foods segments during the pandemic, and will enable us to continue to invest in initiatives that drive growth. However, we cannot assure you that such price increases will not cause a loss of sales, will improve margins in our RFG and Foods segments or that we will be able to undertake future initiatives to drive growth.
Management has considered the impact of current operating results as well as an increase inexpected future results and has concluded that there were no impairment indicators as of July 31, 2021. This is consistent with the sales price per carton of approximately 30.3%. The majority of our tomato sales are done onCompany’s previous assessments which had reflected a consignment basis, in whichsignificant cushion between the gross profit we earn is generally based on a commission agreed to with each party, which usually is a percentCompany’s fair value determinations and the recorded carrying values of the overall selling price; however, we also purchase some tomatoesrespective intangible assets. Management will continue to evaluate the impact of operating results on the spot market to meet specific customer requests and have certain fixed overhead costs associated with our tomato operations which impact the overall gross profit realized from tomato sales. these considerations in future quarters.
Calavo Foods
Calavo Foods
The Calavo Foods segmentFoods’ gross profit percentage increasedfor the third quarter of fiscal 2021 was 5.9%, compared to 31.4% of net sales, during our three26.6% for the prior year period. Calavo Foods’ gross profit percentage for the nine months ended JanuaryJuly 31, 20182021 was 19.3%, compared to 30.3% during28.5% for the same prior year period. The decreases in Calavo Foods gross profit percentage were due primarily to higher per pound fruit costs and manufacturing costs. The increase was primarilyin manufacturing costs for the nine months ended July 31, 2021, compared to the prior year period is mainly due to a higher average selling price for prepared avocado products, partially offset by higher fruit costs anddecrease in the impact of a weaker exchange rate on production costs for the three months ended January 31, 2018, as compared to the same prior year
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period. Note that anypounds produced. Any significant fluctuation in the cost of fruit used in the production process or the exchange rate between the U.S. Dollardollar and the Mexican Pesopeso may have a material impact on future gross profit for our Calavo Foods segments.segment.
RFG
RFG’s gross profit percentage for the quarter ended January 31, 2018 was 5.7%, compared to 9.2% in the same prior year period. This lower gross profit percentage results from the continued ramp up of newer facilities, including our Riverside facility (open for less than one year) and an unusual circumstance at our Houston facility. In the quarter, we experienced reduced service levels at our Houston facility resulting from labor shortages related to the city’s massive rebuild from the aftermath of Hurricane Harvey.
Selling, General and Administrative
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| Three months ended January 31, |
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Selling, general and administrative |
| $ | 15,517 |
| 12.2 | % | $ | 13,826 |
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Percentage of net sales |
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| 6.3 | % |
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| 6.1 | % |
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| Three months ended July 31, | | Nine months ended July 31, | | | ||||||||||||
| 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 | | | ||||
| (Dollars in thousands) | (Dollars in thousands) | | ||||||||||||||
Selling, general and administrative | $ | 12,387 |
| (8) | % | $ | 13,424 |
| $ | 40,374 |
| (9) | % | $ | 44,226 |
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Percentage of net sales |
| 4.3 | % | | |
| 5.0 | % |
| 5.2 | % | | |
| 5.4 | % | |
Selling, general and administrative expenses of $15.5$12.4 million for the three months ended JanuaryJuly 31, 20182021 include costs of marketing and advertising, sales expenses (including broker commissions) and other general and administrative costs, as well as $0.9 million of management transition related expenses.costs. Selling, general and administrative expenses increased $1.7decreased by $1.0 million, or 12.2%8%, for the three months ended JanuaryJuly 31, 2018, when2021 compared to the same period for fiscal 2017.prior year period. This increasedecrease was primarily relateddue to an increasea decrease in salaries and benefitsbenefit expense due to the eliminations of staff positions ($0.3 million), stock-based compensation decreased due to less amortization related to MIP stock awards from prior year ($0.3 million) and a decrease in insurance expense ($0.3 million).
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Selling, general and administrative expenses decreased by $3.9 million, or 9%, for the nine months ended July 31, 2021 compared to the prior year period. This decrease was primarily due to a decrease in salaries and benefit expense due to the eliminations of staff positions ($2.3 million), prior year stock grants for certain management transition expenses ($1.1 million of costs related tomillion) and a decrease in broker commission ($0.7 million). Partially offsetting these decreases was the vesting of restricted stock grants earned by certain members of the senior management team over the past three fiscal years, as well as $0.7 million due in part to higher headcount). Partially offsetting this increase was a decrease of $0.3 million of stock based compensation costs for the retirement of our former Chairman ($0.7 million).
Loss from unconsolidated entities
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| | Three months ended July 31, | | Nine months ended July 31, |
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| | (Dollars in thousands) | | (Dollars in thousands) |
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Loss from unconsolidated entities |
| $ | (469) |
| (60) | % | $ | (1,170) |
| $ | (1,755) |
| (72) | % | $ | (6,375) | |
Losses from unconsolidated entities includes our participation in earnings or losses from our investments in FreshRealm and Don Memo. For the three and nine months ended JanuaryJuly 31, 2018, when compared to2021, we realized losses from Agricola Don Memo totaling $0.5 million and $1.8 million. For the same period for fiscal 2017.
Other Income (Loss), Net
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Other income (loss), net |
| $ | 729 |
| 1,156.5 | % | $ | (69) |
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Percentage of net sales |
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| 0.0 | % |
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| (0.0) | % |
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Other income (loss), net includesthree and nine months ended July 31, 2020, we realized income from unconsolidated subsidiaries, dividend income, as well as certain other transactions that are outside of the normal course of operations. The increase forAgricola Don Memo totaling $0.6 million and $0.9 million. For the three and nine months ended JanuaryJuly 31, 2018, compared to the same prior year periods are primarily due to an increase of income2020, we realized losses from our unconsolidated subsidiary Don Memo (See Note 4 for further information).FreshRealm totaling $1.8 million and $7.2 million.
Provision for Income Taxes (Provision) Benefit
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Provision for income taxes |
| $ | 4,302 |
| 68.0 | % | $ | 2,561 |
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Effective tax rate |
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| 38.1 | % |
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| 32.9 | % |
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| | Three months ended July 31, | | Nine months ended July 31, | | | ||||||||||||
| | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 | | | ||||
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Income tax benefit (provision) |
| $ | (12,358) |
| (364) | % | $ | 4,682 |
| $ | (17,073) |
| (361)% | | $ | 6,540 |
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Effective tax rate | |
| (2,218.7) | % | | |
| 23.1 | % |
| 93.9 | % | | |
| 24.7 | % | |
Our tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter.
In June 2021, we paid $2.4 million related to the settlement of the 2011 Assessment (See Note 7 to the consolidated condensed financial statements included in this Quarterly Report for further information). Of this amount, $1.5 million was included in Income tax provision and $0.9 million which was related to value added taxes was included in expenses related to Mexican tax matters in the accompanying statement of operations.
In July 2021, based on our evaluation of the most probable outcomes of the 2013 Assessment, we have recorded an accrual of $11 million in the accompanying financials, which has been recorded as a discrete item in tax provision expense An additional $0.1 million of related professional fees have also been recorded as expenses related to the Mexican tax matters. See Note 7 to the consolidated condensed financial statements included in this Quarterly Report for further information.
For the first quarter ended in fiscal 2020, we recorded a discrete income tax benefit of approximately $0.2 million, pursuant to ASU 2016-09, Improvements to Employee Share-based Payment Accounting. Our effective tax rate was higher in the first quarter of fiscal 2018, we recorded $1.7 million2020 as a result of discrete excess tax benefits on vesting share-based compensation in one-time, non-cash charges relatedaddition to the revaluation of our net deferred tax assets (approx. $1.4 million) and the transition tax on the
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deemed repatriation of foreign earnings (approx. $0.3 million). In addition, pursuant to ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, we recorded an income tax benefit of approximately $0.4 and $0.3 million forassociated with the quarters ended January 31, 2018 and 2017.quarter-to-date loss. We recognize the effects of tax legislation in the period in which the law is enacted. Our deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years we estimate the related temporary differences to reverse.
Liquidity and Capital Resources
Cash provided by operating activities was $7.9$12.4 million for the threenine months ended JanuaryJuly 31, 2018,2021, compared to cash providedused by operationsoperating activities of $1.7$20.4 million for the similarcorresponding period in fiscal 2017. Operating cash flows2020. Cash used by operating activities for the threenine months ended JanuaryJuly 31, 20182021 reflect primarily our net income of $7.0$1.1 million, plus add-backs for
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non-cash activities (depreciation and amortization, stockstock-based compensation expense, provision for losses on accounts receivable, losses from unconsolidated entities, net gains or losses on Limoneira shares, deferred taxes, loss on disposal of property, plant and income from unconsolidated entities)equipment, loss on the reserve for FreshRealm, SFFI, and gain on the sale of $5.9the Temecula packinghouse) of $4.3 million and a net decreaseincrease in the non-cash components of our operatingworking capital of approximately $5.0$7.0 million.
TheIncreases in operating cash flows caused by working capital decreaseschanges include an increase in payable to growers of $18.7 million, a net decreaseincrease in accounts payable, and accrued expenses and other liabilities of $5.3$14.5 million, an increasea decrease in accountsincome taxes receivable of $2.9$4.0 million, an increase in other assets of $1.5 million, an increaseand a decrease in prepaid expenses and other current assets of $0.9$1.4 million, partially offset by, an increase in accounts receivable of $16.1 million, an increase in other assets of $6.1 million, an increase in inventory of $5.7 million, and an increase in inventory of $0.4 million, partially offset by a decrease in advances to suppliers of $2.5$3.6 million.
The increase in payable to growers is mostly due to increased volumes and sales prices for California and Mexican avocados in the month of July 2021 compared to October 2020. The increase in accounts payable, accrued expenses and other liabilities is primarily related to an $11 million accrual related to the 2013 Mexican Tax Assessment (See Note 7) and to an increase in income taxes payablepayables related to an increase in the volume of $1.4 million, aCalifornia and Mexican avocados. The decrease in income taxes receivable of $1.4 million and an increase in payable to growers of $0.8 million.
The decrease in accounts payable and accrued expenses is primarily relateddue to the timing of our accrual for year-end performance bonuses.estimated payments made during the nine months ended July 31, 2021. The increase in our accounts receivable, as of JanuaryJuly 31, 20182021, when compared to October 31, 2017,2020, is primarily reflects higherdue an increase in sales recorded in the month of January 2018, asJuly 2021 compared to October 2017.2020. The increase in other assets is due to an increase in Mexican IVA tax receivable (see Note 11 to our consolidated condensed financial statements). The decrease in income taxes receivable and the increase in income taxes payable is primarily related to the taxes on current year earnings and the changeincrease in the tax rateIVA receivable in fiscal 2021. The increase in our inventory, as of July 31, 2021 when compared to October 31, 2020, is primarily due to the passagehigher inventory of the Tax CutsCalifornia and Jobs Act legislation that passed December 22, 2017.Mexican Avocados. The decreaseincrease in advances to suppliers primarily reflects less pre-seasonis mainly due to advances outstanding to our tomato growers in January 2018, compared to October 2017. The increase in payable to growers primarily reflects an increase in our Mexican avocado grower liability.the first nine months of fiscal 2021.
Cash used in investing activities was $5.3$8.5 million for the threenine months ended JanuaryJuly 31, 2018,2021, which primarily related to the purchases of property, plant and equipment purchases of $5.4$9.6 million, a $3.5 million bridge loan to Agricola Belher and infrastructure advances to Don Memo for $1.3 million, partially offset by, proceeds$6.0 million received from FreshRealm related to the repayment of the San Rafael note of $0.1 million.separation agreement.
Cash used byin financing activities was $6.3$6.6 million for the threenine months ended JanuaryJuly 31, 2018,2021, which related principally to the payment of our $16.7a $20.3 million dividend, payments on long-term obligations of $1.2 million and the payment of minimum withholding taxes on net share settlement of equity awards of $1.2$0.7 million, and partially offset by, receiptsnet proceeds on our credit facilities totaling $11.5$15.5 million and proceeds received for exercise of stock options of $0.1 million.
Our principal sources of liquidity are our existing cash balances, cash generated from operations, and amounts available for borrowing under our existing Credit Facility. CashFacility, and our investment in Limoneira shares. Restricted cash, cash and cash equivalents as of JanuaryJuly 31, 20182021 and October 31, 20172020 totaled $2.9$1.3 million and $6.6$4.1 million. Our working capital at JanuaryJuly 31, 20182021 was $9.8$57.6 million, compared to $3.7$29.6 million at October 31, 2017.2020.
We believe that cash flows from operations, and the available Credit Facility, and other sources will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements for at least the next twelve months. We will continue to evaluatepursue grower recruitment opportunities and expand relationships with retail and/or foodservice customers to fuel growth in each of our business segments. We have a revolving credit facility with Bank of America as administrative agent and Merrill Lynch, Pierce, Fenner & Smith Inc. as joint lead arranger and sole bookrunner, and Farm Credit West as joint lead arranger. Under the terms of this agreement, we are advancedmay draw on funds for both working capital and long-term productive asset purchases. Total credit available under this agreement is $80$100 million and will expireit expires in June 2021.January 2026. See Note 13 to the consolidated condensed financial statements included in this Quarterly Report for more information. Upon notice to Bank of America, we may from time to time, request an increase in the Credit Facility by an amount not exceeding $50 million. For our current credit agreementCredit Facility, the weighted-average interest rate was 2.8%2.9% and 2.2%1.9% at JanuaryJuly 31, 20182021 and October 31, 2017.2020. Under these credit facilities,the Credit Facility, we had $31.5$36.0 million and $20.0$20.6 million outstanding as JanuaryJuly 31, 20182021 and October 31, 2017. 2020. As of July 31, 2021, we have $64 million of our line of credit available.
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ThisThe Credit Facility agreement contains customary affirmative and negative covenants for agreements of this type, including the following financial covenants applicable to the Company and its subsidiaries on a consolidated basis: (a) a quarterly consolidated leverage ratio of not more than 2.50 to 1.00 and (b) a quarterly consolidated fixed charge coverage
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ratio of not less than 1.15 to 1.00. We were in compliance with all such covenants at JanuaryJuly 31, 2018. 2021 and at the date of this Quarterly Report.
Contractual Obligations
There have been no material changes to our contractual commitments, other than the Mexican tax matters discussed in footnote 7, from those previously disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, 2017.2020. For a summary of the contractual commitments at October 31, 2017,2020, see Part II, Item 7, in our 20172020 Annual Report on Form 10-K.
Impact of Recently Issued Accounting Pronouncements
See Note 1 to the consolidated condensed financial statements that are included in this Quarterly Report on Form 10-Q.Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts receivable, payable to growers, accounts payable, current and long-term borrowings pursuant to our credit facilities with financial institutions,Credit Facility, and long-term, fixed-rate obligations. All of our financial instruments are entered into during the normal course of operations and have not been acquired for trading purposes. The table below summarizes interest rate sensitive financial instruments and presents principal cash flows in U.S. dollars, which is our reporting currency, and weighted-average interest rates by expected maturity dates, as of JanuaryJuly 31, 2018.2021.
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(All amounts in thousands) | | Expected maturity date July 31, | | ||||||||||||||||||||||
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| 2024 |
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Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted cash, cash and cash equivalents (1) | | $ | 1,338 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,338 | | $ | 1,338 | |
Accounts receivable (1) | |
| 79,979 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 79,979 | |
| 79,979 | |
Advances to suppliers (1) | |
| 8,703 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 8,703 | |
| 8,703 | |
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Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | |
Payable to growers (1) | | $ | 30,040 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 30,040 | | $ | 30,040 | |
Accounts payable (1) | |
| 10,424 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 10,424 | |
| 10,424 | |
Borrowings pursuant to credit facilities (1) | |
| — | |
| — | |
| — | |
| — | |
| 36,000 | |
| — | |
| 36,000 | |
| 36,000 | |
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(All amounts in thousands) |
| Expected maturity date October 31, |
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Assets |
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Cash and cash equivalents (1) |
| $ | 2,942 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 2,942 |
| $ | 2,942 |
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Accounts receivable (1) |
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| 72,655 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 72,655 |
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| 72,655 |
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Liabilities |
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Payable to growers (1) |
| $ | 17,304 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 17,304 |
| $ | 17,304 |
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Accounts payable (1) |
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| 20,676 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 20,676 |
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| 20,676 |
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Current borrowings pursuant to credit facilities (1) |
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| 31,500 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 31,500 |
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| 31,500 |
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Fixed-rate long-term obligations (2) |
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| 123 |
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| 128 |
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| 128 |
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| 105 |
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| 48 |
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| — |
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| 532 |
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| 553 |
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(1) |
| We believe the carrying amounts of cash and cash equivalents, accounts receivable, advances to suppliers, payable to growers, and accounts payable |
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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 affiliatesMexican-based operations transact a significant portion of business primarily in Mexican pesos. Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy the domestic cash needs of our Mexican affiliates.needs. We do not currently use derivative instruments to hedge fluctuations in the Mexican peso to U.S. dollar exchange rates. Management does, however, evaluate this opportunity from time to time. Total foreign currency transaction losses for the three months ended January 31, 2018, net of gains, was $0.2 million. Total foreign currency transactionremeasurement gains for the three months ended JanuaryJuly 31, 2017,2021 and 2020, net of losses, was $0.1$0.6 million and $1.4 million. Total foreign currency remeasurement gains for the nine months ended July 31, 2021, net of losses, was $1.1 million. Total foreign currency remeasurement losses for the nine months ended July 31, 2020, net of gains, was $1.9 million.
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ITEM 4.4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting during the quarter ended JanuaryJuly 31, 20182021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are also involved in litigation arising in the ordinary course of our business thatbusiness. We have provided information about certain legal proceedings in which we do not believe will have a material adverse impact on our financial statements.
Seeare involved in Note 7 in ourto the consolidated condensed financial statements included in this Quarterly Report for further information regarding legal proceedings.information.
For a discussion of ourThe risk factors see Part 1, item 1A “Risk Factors” ofset forth below update the risk factors in our Annual Report on Form 10-K for the year ended October 31, 2017. There have been no material changes from2020. In addition to the risk factors set forthbelow, you should carefully consider the risk factors discussed in such Annual Report onour most recent Form 10-K. However,10-K report, which could materially affect our business, financial position, results of operations and the trading price of our common stock. The risks and uncertainties that we face are not limited to those set forth below and/or in the 20172020 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock.
The recovery from the COVID-19 pandemic and the current economic climate is increasing labor costs, commodity costs and logistical costs which has adversely affected our business operations and results of operations and may continue to do so in the future. Our efforts to raise prices may not be successful at offsetting these cost increases and may have other adverse effects.
We have experienced operational challenges to our production facilities and logistics networks, shortage of labor and impacts from increases in prices of petroleum-based products, packaging materials and commodities, all of which are increasing costs companywide with the effects especially pronounced at RFG. These factors and others caused a significant decline in gross margin for our RFG segment and on a companywide basis for the three months ended July 31, 2021 compared to the prior year period.
Beginning in the third quarter of fiscal 2021, in response to these inflationary costs, we began to notify our customers of our plans to institute price increases for our RFG and Foods products. We cannot assure you that these price increases will be accepted by our customers without significant loss of sales or will reverse the margin compression experienced by RFG and Foods segments during the pandemic. If compressed gross profits continue or if we experience a loss of sales due to price increases in our RFG and Foods segments, we may not be able to undertake future initiatives to drive growth.
A continued shortage of qualified labor could negatively affect our business and materially reduce earnings.
We have experienced shortages of qualified labor across our operations. Participants in our supply chain have also experienced shortages of qualified labor. The future success of our operations, including the achievement of our strategic objectives, depends on our ability, and the ability of third parties on which we rely to supply and to deliver our products, to identify, recruit, develop and retain qualified and talented individuals. As a result, any shortage of qualified labor could significantly adversely affect our business. Employee recruitment, development and retention efforts that we or such third parties undertake may not be successful, which could result in a shortage of qualified individuals in future
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periods. Any such shortage could decrease our ability to effectively produce and deliver product and to achieve our strategic objectives. Such a shortage would also likely lead to higher wages for employees (or higher costs to purchase the services of such third parties) and a corresponding reduction in our results of operations. In the current operating environment, we are experiencing a shortage of qualified labor in certain geographies, particularly with plant production workers, resulting in increased costs from certain temporary wage actions, such as hiring and referral and retention bonus program. A continuation of such shortages for a prolonged period of time could have a material adverse effect on our results of operations.
Management and key personnel changes may disrupt our operations, and we may have difficulty attracting and retaining qualified replacements.
We have experienced changes in management and other key personnel in critical functions across our organization, including our chief executive officer and our chief financial officer. Both of these offices will be held on an interim basis until we are able recruit qualified replacements. Changes in management and other key personnel have the potential to disrupt our business, and any such disruption could adversely affect our operations, programs, growth, financial condition and results of operations. Further, new members of management may have different perspectives on programs and opportunities for our business, which may cause us to focus on new business opportunities or reduce or change emphasis on our existing business programs.
Our success is dependent upon our ability to attract and retain qualified management and key personnel in a highly competitive environment. Qualified individuals are in high demand, and we may incur significant costs to attract them, particularly at the executive level. We may face difficulty in attracting, retaining and compensating key talent for a number of reasons, including competitive market conditions and the need to align the vision of a new executive team with our Board’s vision for our company. We cannot assure you that we will be able to hire or retain the personnel necessary to achieve our strategic vision, that personnel we do recruit will be successful or that the loss of any such personnel will not have a material impact on our financial condition and results of operations.
Our dispute with Mexican tax authorities related to the 2013 Tax Assessment may have a material adverse effect on our results of operations and financial position. This dispute has resulted in liens placed on the fixed assets and bank accounts of Calavo de Mexico.
In July 2018, a local office of the Servicio de Administracion Tributaria in Mexico (the “SAT”) issued a final tax assessment (the “2013 Assessment”) totaling approximately $2.6 billion Mexican pesos (which includes annual adjustments for inflation, and equals approx. $128.8 million USD at July 31, 2021) related to a fiscal 2013 tax audit. This amount has been adjusted for inflation as of July 31, 2021 to the amount of $3 billion Mexican pesos (approx. $150 million USD). Additionally, the tax authorities have determined that we owe our employees profit-sharing liability, totaling approximately $118 million Mexican pesos (approx. $5.8 million USD at July 31, 2021). In August 2018, we filed an administrative appeal (the “Administrative Appeal”) on the 2013 Assessment, appealing our case to the SAT’s Legal Administration in Michoacan.
On June 25, 2021, we became aware that the Administrative Appeal had been resolved against Calavo de Mexico (“CDM”) on March 12, 2021, and that CDM had allegedly failed to timely respond to and challenge the SAT’s notification of such resolution, therefore rendering the 2013 Assessment as definitive. In addition, the SAT has placed liens on the fixed assets of CDM, with a net book value of approximately $26 million USD, and on bank accounts of CDM totaling approximately $1 million USD in order to guaranty the 2013 Assessment.
While we have taken measures to vigorously defend our position that the 2013 Assessment is without merit, including filing a writ with the SAT requesting a substitution of a financial bond for the above-mentioned liens, filing an Administrative Reconsideration (the “Reconsideration”) before the Central Legal Department of the SAT located in Mexico City, filing a formal complaint, or queja, (the “Complaint”) before the PRODECON (Mexican Tax Ombudsman) to request their assistance with having the SAT act upon the Reconsideration and filing an Annulment Suit (the “Suit”) with the Federal Tax Court, which among other things, contends that the notifications made by the SAT to CDM and its designated advisors of the resolution of the Administrative Appeal in March 2021 was not legally communicated and
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asserts same matters central to the Reconsideration as wrongly concluded in the resolution of the Administrative Appeal, we cannot assure you that any of these measures will be successful or that we will be able to settle the 2013 Assessment on terms acceptable to us or at all. Such outcomes could have a material adverse effect on our results of operations and financial condition and could result in an event of default under our credit facility and the acceleration of indebtedness under such facility. Further, we cannot assure you that the provision for this matter in our financial statements will be adequate to fund any settlement we may ultimately enter into or any amount of taxes that the SAT is ultimately able to recover.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In December 2020, Calavo withheld 12,448 shares from certain officers for the payments of minimum withholding of taxes on the net share settlement of equity awards.In February 2021, Calavo withheld 1,664 shares from our chief executive officer for the payment of minimum withholding of taxes on the net share settlement of equity awards. In May 2021, Calavo withheld 603 shares from our former chief financial officer for the payment of minimum withholding of taxes on the net share settlement of equity awards.
ITEM 6. EXHIBITSEXHIBITS
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| | 10.1 | Separation Agreement dated June 16th, 2021 by and between Calavo Growers, Inc. and Kevin Manion (1) |
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| | 10.2 | |
| | 31.1 | * |
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| | 31.2 | |
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| | 32.1 | * |
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| | 101 | The following financial information from the Quarterly Report on Form 10-Q of Calavo Growers, Inc. for the quarter ended |
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INDEX TO EXHIBITS
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| |
| Cover Page Interactive Data File (formatted as Inline XBRL). |
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| (1) | |
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* | Filed with this Form 10-Q. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Calavo Growers, Inc. | |
| (Registrant) | |
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Date: | | |
| By | /s/ |
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| Chief Executive Officer | |
| | (Principal Executive Officer) |
| | |
| | |
Date: | | |
| By | /s/ |
| |
|
| | Chief Financial Officer |
| | (Principal Financial Officer) |
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