UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~April 30, 2018~~January 31, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-33385

CALAVO GROWERS, INC.

(Exact name of registrant as specified in its charter)

California	33-0945304
(State of incorporation)	(I.R.S. Employer Identification No.)

1141-A Cummings Road

Santa Paula, California 93060

(Address of principal executive offices) (Zip code)

(805) 525-1245

(Registrant's telephone number, including area code)

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 ☐

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,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. ~~(Check one~~):

Emerging Growth Company ☐
Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller Reporting Company ☐
Emerging growth company ☐	~~(Do not check if a smaller reporting 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) of the Securities 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 ~~April 30, 2018~~January 31, 2019 was ~~17,567,616~~17,597,734

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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, uncertainties 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) 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, currency exchange rates, the impact of acquisitions 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; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic trends and events; the competitive pressures 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; and other risks that are described herein, including, but not limited to, the items discussed in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended October 31, ~~2017,~~2018, and those detailed from time to time in our other filings with the Securities and Exchange Commission. Calavo assumes no obligation and does not intend to update these forward-looking statements.

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CALAVO GROWERS, INC.

INDEX

		PAGE

PART I. FINANCIAL INFORMATION

Item 1.

	Consolidated Condensed Balance Sheets – ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017~~2018	4

	Consolidated Condensed Statements of Income – Three Months Ended January 31, 2019 and ~~Six Months Ended April 30, 2018 and 2017~~2018	5

	Consolidated Condensed Statements of Comprehensive Income – Three Months Ended January 31, 2019 and ~~Six Months Ended April 30, 2018 and 2017~~2018	6

	Consolidated Condensed Statements of Cash Flows – Three Months Ended January 31, 2019 and ~~Six Months Ended April 30, 2018 and 2017~~2018	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2122

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	30

Item 6.	Exhibits	30

	Signatures	32

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)


	April 30,			October 31,		January 31,		October 31,
	2018			2017		2019		2018

Assets
Current assets:
Cash and cash equivalents	$	2,377		$	6,625	$	4,211	$	1,520
Accounts receivable, net of allowances of $3,234 (2018) $2,490 (2017)		76,925			69,750
Accounts receivable, net of allowances of $4,528 (2019) $3,227 (2018)							73,323		66,143
Inventories, net		39,158			30,858		38,463		35,044
Prepaid expenses and other current assets		7,026			6,872		8,033		16,727
Advances to suppliers		2,719			4,346		4,332		5,555
Income taxes receivable		—			1,377		2,296		3,521
Total current assets		128,205			119,828		130,658		128,510
Property, plant, and equipment, net		121,803			120,072		122,522		122,143
Investment in Limoneira Company		40,241			40,362		36,951		42,609
Investment in unconsolidated entities		33,297			33,019		18,507		24,805
Deferred income taxes		8,641			9,783		4,377		4,377
Goodwill		18,262	��		18,262		18,262		18,262
Loans to FreshRealm							19,942		—
Other assets		24,330			22,791		29,046		27,030
	$	374,779		$	364,117	$	380,265	$	367,736
Liabilities and shareholders' equity
Current liabilities:
Payable to growers	$	27,373		$	16,524	$	10,247	$	14,001
Trade accounts payable		16,420			22,911		16,917		13,735
Accrued expenses		36,752			39,946		39,528		38,521
Income taxes payable		1,884			—
Short-term borrowings		21,000			20,000		39,000		15,000
Dividend payable		—			16,657		—		17,568
Current portion of long-term obligations		117			129		112		118
Total current liabilities		103,546			116,167		105,804		98,943
Long-term liabilities:
Long-term obligations, less current portion		383			439		271		314
Deferred rent		2,706			2,732		2,895		2,678
Other long-term liabilities		—			657		842		842
Total long-term liabilities		3,089			3,828		4,008		3,834
Commitments and contingencies
Shareholders' equity:
Common stock ($0.001 par value, 100,000 shares authorized; 17,568 (2018) and 17,533 (2017) shares issued and outstanding)		18			18
Common stock ($0.001 par value, 100,000 shares authorized; 17,598 (2019) and 17,567 (2018) shares issued and outstanding)							18		18
Additional paid-in capital		156,069			154,243		158,941		157,928
Accumulated other comprehensive income		10,624			10,434		—		12,141
Noncontrolling interest		1,761			1,016		1,742		1,748
Retained earnings		99,672			78,411		109,752		93,124
Total shareholders' equity		268,144			244,122		270,453		264,959
	$	374,779		$	364,117	$	380,265	$	367,736

The accompanying notes are an integral part of these consolidated condensed financial statements.

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)


	Three months ended				Six months ended				Three months ended
	April 30,				April 30,				January 31,
	2018		2017		2018		2017		2019		2018

Net sales	$	264,405	$	270,162	$	512,333	$	496,716	$	258,032	$	247,928
Cost of sales		232,436		233,909		454,054		438,539		227,195		221,618
Gross profit		31,969		36,253		58,279		58,177		30,837		26,310
Selling, general and administrative		12,875		15,426		28,392		29,252		14,276		15,517
Operating income		19,094		20,827		29,887		28,925		16,561		10,793
Interest expense		(288)		(323)		(519)		(570)		(254)		(231)
Other income (expense), net		(26)		33		703		(36)
Income before provision for income taxes		18,780		20,537		30,071		28,319
Other income, net										510		126
Unrealized and realized net loss on Limoneira shares										(4,505)		—
Income before provision for income taxes and income/(loss) from unconsolidated entities										12,312		10,688
Provision for income taxes		4,764		7,603		9,066		10,164		1,533		4,302
Income/(loss) from unconsolidated entities										(6,298)		603
Net income		14,016		12,934		21,005		18,155		4,481		6,989
Less: Net loss attributable to noncontrolling interest		106		11		256		39		6		150
Net income attributable to Calavo Growers, Inc.	$	14,122	$	12,945	$	21,261	$	18,194	$	4,487	$	7,139

Calavo Growers, Inc.’s net income per share:
Basic	$	0.81	$	0.74	$	1.22	$	1.05	$	0.26	$	0.41
Diluted	$	0.80	$	0.74	$	1.21	$	1.04	$	0.26	$	0.41

Number of shares used in per share computation:
Basic		17,481		17,426		17,472		17,402		17,500		17,446
Diluted		17,580		17,539		17,561		17,486		17,558		17,525

The accompanying notes are an integral part of these consolidated condensed financial statements.

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three months ended				Six months ended				Three months ended
	April 30,				April 30,				January 31,
	2018		2017		2018		2017		2019		2018
Net income	$	14,016	$	12,934	$	21,005	$	18,155	$	4,481	$	6,989
Other comprehensive income, before tax:
Unrealized investment gains (losses)		2,990		6,361		(121)		1,711
Income tax (expense) benefit related to items of other comprehensive income		(778)		(2,322)		311		(625)
Other comprehensive income, net of tax		2,212		4,039		190		1,086
Unrealized investment losses										—		(3,111)
Income tax benefit related to items of other comprehensive income										—		1,089
Other comprehensive loss, net of tax										—		(2,022)
Comprehensive income		16,228		16,973		21,195		19,241		4,481		4,967
Less: Net loss attributable to noncontrolling interest		106		11		256		39		6		150
Comprehensive income – Calavo Growers, Inc.	$	16,334	$	16,984	$	21,451	$	19,280	$	4,487	$	5,117

The accompanying notes are an integral part of these consolidated condensed financial statements.

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Six months ended April 30,				Three months ended January 31,
	2018		2017		2019		2018

Cash Flows from Operating Activities:
Net income	$	21,005	$	18,155	$	4,481	$	6,989
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,561		4,575		3,392		3,211
Provision for losses/recoveries on accounts receivable		(8)		1,424
Loss (income) from unconsolidated entities		(278)		403		6,298		(603)
Stock compensation expense		2,774		2,658
Unrealized and realized net loss on Limoneira shares						4,505		—
Stock-based compensation expense						966		1,832
Deferred income taxes		1,453		—		—		1,453
Effect on cash of changes in operating assets and liabilities:
Accounts receivable, net		(7,167)		(26,293)		(7,181)		(2,905)
Inventories, net		(8,300)		(6,785)		(3,419)		(326)
Prepaid expenses and other current assets		(224)		(357)		(418)		(920)
Advances to suppliers		1,627		2,934		1,223		2,454
Income taxes receivable/payable		3,261		4,684		1,225		2,745
Other assets		(2,263)		(1,321)		(2,735)		(1,465)
Payable to growers		10,849		16,516		(3,753)		780
Deferred rent		(26)		(21)		217		(13)
Trade accounts payable, accrued expenses and other long-term liabilities		(8,076)		6,709		5,570		(5,335)
Net cash provided by operating activities		21,188		23,281		10,371		7,897
Cash Flows from Investing Activities:
Acquisitions of and deposits on property, plant, and equipment		(8,838)		(34,093)		(3,867)		(5,394)
Proceeds received for repayment of San Rafael note		232		216		112		112
Investment in FreshRealm		—		(4,625)
Proceeds received from Limoneira stock sales						1,153		—
Loan to FreshRealm						(10,500)		—
Net cash used in investing activities		(8,606)		(38,502)		(13,102)		(5,282)
Cash Flows from Financing Activities:
Payment of dividend to shareholders		(16,657)		(15,696)		(17,568)		(16,657)
Proceeds from revolving credit facility		119,000		83,500		89,500		58,000
Payments on revolving credit facility		(118,000)		(55,000)		(65,500)		(46,500)
Payment of minimum withholding taxes on net share settlement of equity awards		(1,158)		—		(1,008)		(1,158)
Purchase of noncontrolling interest of Salsa Lisa		—		(1,000)
Payments on long-term obligations		(68)		(22)		(49)		(36)
Proceeds from stock option exercises		53		65		47		53
Net cash provided by (used in) financing activities		(16,830)		11,847		5,422		(6,298)
Net decrease in cash and cash equivalents		(4,248)		(3,374)
Net increase (decrease) in cash and cash equivalents						2,691		(3,683)
Cash and cash equivalents, beginning of period		6,625		13,842		1,520		6,625
Cash and cash equivalents, end of period	$	2,377	$	10,468	$	4,211	$	2,942
Noncash Investing and Financing Activities:
Property, plant, and equipment included in trade accounts payable and accrued expenses	$	725	$	863	$	573	$	1,063
Noncash transfer of noncontrolling interest	$	1,001	$	—	$	—	$	1,001
Unrealized investment gain (losses)	$	(121)	$	1,711
Unrealized investment gain					$	—	$	(3,111)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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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 expanding~~a provider of value-added fresh food. Our expertise in marketing and distributing avocados, prepared avocados, and other perishable foods allows us to deliver a wide array of fresh and prepared food products to retail grocery, foodservice, club stores, mass merchandisers, food distributors and wholesalers on a worldwide basis. We procure avocados from California, Mexico and other growing regions around the world. Through our various operating facilities, we (i) sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas, (ii) create, process and package ~~guacamole and salsa and (iii) create, process and package~~ a portfolio of healthy fresh foods including fresh-cut fruit ~~fresh-cut~~and vegetables, and prepared ~~foods.~~foods and (iii) process and package guacamole and salsa. We distribute our products both domestically and internationally and report our operations in three different business segments: Fresh products, Calavo Foods and Renaissance Food Group (RFG).

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.~~2018.

Recently Adopted Accounting Pronouncements

In ~~May 2017,~~January 2016, the FASB issued an ASU, ~~Stock Compensation (Topic 718), Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be~~which requires equity investments (except those accounted for ~~as modifications.~~under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The guidance ~~clarifies that modification accounting~~is effective for fiscal years and interim period within those fiscal years beginning after December 15, 2017. The Company adopted this new standard at the beginning of fiscal 2019. With the adoption of this new standard, we reclassed unrealized gains of $12.1 million in accumulated other comprehensive income to retained earnings as of November 1, 2018. Additionally, for the three months ended January 31, 2019, we sold 51,271 shares of Limoneira stock and recorded a loss of $0.1 million in our consolidated statements of income. Limoneira’s stock price at January 31, 2019 and October 31, 2018 equaled $22.03 per share and $24.65 per share. Our remaining shares of Limoneira stock, totaling 1,677,299 at January 31, 2019, were revalued to $22.03 per share and, as a result, we recorded a loss of $4.4 million in our consolidated statements of income.

In May 2014, the FASB issued a comprehensive new revenue recognition standard which will ~~be applied if~~supersede previous existing revenue recognition guidance. The standard is intended to clarify the ~~value, vesting conditions or classification~~principles 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 ~~award changes.~~FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. The Company adopted this new standard at the beginning inof fiscal 2019 using the ~~three months ended January 31, 2018.~~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. The adoption of the amendment did not have ~~a material~~an impact on the Company’s consolidated financial statements. See Note 14 for further information.

~~Recently Issued Accounting Standards~~

~~In February 2017, the FASB issued an ASU,~~ ~~Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,~~ which clarifies the scope of asset derecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. This ASU will be effective for us beginning the first day of our 2019 fiscal year. Early adoption is permitted. We do not expect this ASU to have an impact until an applicable transaction takes place.

~~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 transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU will be effective for us beginning the first day of our 2019 fiscal year. Early adoption is permitted. We do not expect this ASU to have an impact until an applicable transaction takes place.

In October 2016, the FASB issued an ASU, Intra-Entity Transfers of Assets Other Than Inventory, which will require companies to recognize the income tax effects of intra-entity sales and transfers of assets other than inventory,

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~~particularly those asset transfers involving intellectual property, in~~

Recently Issued Accounting Standards

In June 2018, the ~~period in which~~FASB issued an ASU, Improvements to Nonemployee Share-Based Payment Accounting. The FASB issued this update to simplify the ~~transfer occurs. The~~accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. This ASU will be effective for us beginning the first day of our ~~2019~~2020 fiscal ~~year~~year. We are evaluating the impact of the update of this ASU on our financial condition, results of operations and cash flows, and, as such, we are not able to estimate the effect the adoption of the new standard will have on our financial statements.

In February 2018, the FASB issued an ASU, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which amends Accounting Standards Codification ("ASC") 220, Income Statement — Reporting Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act, (the "Act"). In addition, under the ASU, an entity will be required to provide certain disclosures regarding stranded tax effects. This ASU is effective for us the first day of our 2020 fiscal year. Early adoption is permitted. We are evaluating the impact of adoption of this ASU on our financial condition, results of operations and cash flows, and, as such, we are not ~~expected~~able to estimate the effect the adoption of the new standard will have ~~a significant impact upon adoption.~~on our financial statements.

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 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 be 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. 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~~our consolidated financial statements, we currently expect the most significant changes will be related to the recognition of material new long-term 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 fiscal years and interim period within those fiscal years beginning after December 15, 2017. Early adoption is permitted. The impact of the adoption of this ASU on our consolidated statements of income depends on the net unrealized gain or loss on our equity investment. For the three months ended April 30, 2018 and 2017, the net unrealized gain on our equity investment was $3.0 million and $6.4 million. For the six months ended April 30, 2018, the net unrealized loss on our equity investment was $0.1 million. For the six months ended April 30, 2017, the net unrealized gain on our equity investment was $1.7 million.

In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard is intended to clarify the principles 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 guidance 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.

2. Information regarding our operations in different segments

We report our operations in three different business segments: (1) Fresh products, (2) Calavo Foods, and (3) RFG. These three 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 avocado 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. Selling, general and administrative expenses, as well as other non-operating income/expense items,

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are evaluated by our Chief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them to, our operating segments. Data in the following tables is presented in thousands:

Three months ended  April 30, 2018

Three months ended April 30, 2017


Fresh

Calavo





Fresh

Calavo




products

Foods

RFG

Total

products

Foods

RFG

Total

Avocados

$
127,743

$
—

$
—

$
127,743

$
142,933

$
—

$
—

$
142,933

Tomatoes

7,963

—

—

7,963

11,187

—

—

11,187

Papayas

2,852

—

—

2,852

1,955

—

—

1,955

Other fresh products

69

—

—

69

6

—

—

6

Prepared avocado products

—

25,235

—

25,235

—

19,265

—

19,265

Salsa

—

740

—

740

—

935

—

935

Fresh-cut fruit & vegetables and prepared foods

—

—

104,982

104,982

—

—

98,028

98,028

Total gross sales

138,627

25,975

104,982

269,584

156,081

20,200

98,028

274,309

Less sales incentives

(438)

(3,271)

(425)

(4,134)

(256)

(2,805)

(326)

(3,387)

Less inter-company eliminations

(254)

(791)

—

(1,045)

(202)

(558)

—

(760)

Net sales

$
137,935

$
21,913

$
104,557

$
264,405

$
155,623

$
16,837

$
97,702

$
270,162

Six months ended April 30, 2018

Six months ended April 30, 2017


Fresh

Calavo





Fresh

Calavo




products

Foods

RFG

Total

products

Foods

RFG

Total

Avocados

$
236,672

$
—

$
—

$
236,672

$
247,665

$
—

$
—

$
247,665

Tomatoes

20,047

—

—

20,047

16,459

—

—

16,459

Papayas

5,657

—

—

5,657

4,319

—

—

4,319

Other fresh products

104

—

—

104

101

—

—

101

Prepared avocado products

—

47,038

—

47,038

—

38,515

—

38,515

Salsa

—

1,605

—

1,605

—

2,033

—

2,033

Fresh-cut fruit & vegetables and prepared foods

—

—

211,758

211,758

—

—

196,075

196,075

Total gross sales

262,480

48,643

211,758

522,881

268,544

40,548

196,075

505,167

Less sales incentives

(1,092)

(6,049)

(1,095)

(8,236)

(533)

(5,506)

(666)

(6,705)

Less inter-company eliminations

(668)

(1,644)

—

(2,312)

(329)

(1,417)

—

(1,746)

Net sales

$
260,720

$
40,950

$
210,663

$
512,333

$
267,682

$
33,625

$
195,409

$
496,716

109

Table of Contents

Fresh

Calavo




products

Foods

RFG

Total

Three months ended  April 30, 2018

Net sales before intercompany eliminations

$
138,189

$
22,704

$
104,557

$
265,450

Intercompany eliminations

(254)

(791)

—

(1,045)

Net sales

137,935

21,913

104,557

264,405

Cost of sales before intercompany eliminations

123,052

14,840

95,589

233,481

Intercompany eliminations

(237)

(479)

(329)

(1,045)

Cost of sales

122,815

14,361

95,260

232,436

Gross profit

$
15,120

$
7,552

$
9,297

$
31,969

Three months ended  April 30, 2017

Net sales before intercompany eliminations

$
155,825

$
17,395

$
97,702

$
270,922

Intercompany eliminations

(202)

(558)

—

(760)

Net sales

155,623

16,837

97,702

270,162

Cost of sales before intercompany eliminations

131,985

11,634

91,050

234,669

Intercompany eliminations

(159)

(397)

(204)

(760)

Cost of sales

131,826

11,237

90,846

233,909

Gross profit

$
23,797

$
5,600

$
6,856

$
36,253


	Three months ended January 31, 2019								Three months ended January 31, 2018

	Fresh		Calavo						Fresh		Calavo
	products		Foods		RFG		Total		products		Foods		RFG		Total

Avocados	$	103,995	$	—	$	—	$	103,995	$	108,929	$	—	$	—	$	108,929
Tomatoes		11,392		—		—		11,392		12,084		—		—		12,084
Papayas		2,939		—		—		2,939		2,805		��—		—		2,805
Other fresh products		80		—		—		80		34		—		—		34
Prepared avocado products		—		24,252		—		24,252		—		21,803		—		21,803
Salsa		—		853		—		853		—		865		—		865
Fresh-cut fruit & vegetables and prepared foods		—		—		119,541		119,541		—		—		106,776		106,776
Total gross sales		118,406		25,105		119,541		263,052		123,852		22,668		106,776		253,296
Less sales incentives		(957)		(2,034)		(477)		(3,468)		(652)		(2,778)		(670)		(4,100)
Less inter-company eliminations		(595)		(957)		—		(1,552)		(415)		(853)		—		(1,268)
Net sales	$	116,854	$	22,114	$	119,064	$	258,032	$	122,785	$	19,037	$	106,106	$	247,928


	Fresh		Calavo						Fresh		Calavo
	products		Foods		RFG		Total		products		Foods		RFG		Total

Six months ended April 30, 2018
Three months ended January 31, 2019
Net sales before intercompany eliminations	$	261,388	$	42,594	$	210,663	$	514,645	$	117,449	$	23,071	$	119,064	$	259,584
Intercompany eliminations		(668)		(1,644)				(2,312)		(595)		(957)		—		(1,552)
Net sales		260,720		40,950		210,663		512,333		116,854		22,114		119,064		258,032

Cost of sales before intercompany eliminations		231,955		28,461		195,950		456,366		96,591		16,327		115,829		228,747
Intercompany eliminations		(612)		(1,038)		(662)		(2,312)		(527)		(645)		(380)		(1,552)
Cost of sales		231,343		27,423		195,288		454,054		96,064		15,682		115,449		227,195
Gross profit	$	29,377	$	13,527	$	15,375	$	58,279	$	20,790	$	6,432	$	3,615	$	30,837

Six months ended April 30, 2017
Three months ended January 31, 2018
Net sales before intercompany eliminations	$	268,011	$	35,042	$	195,409	$	498,462	$	123,200	$	19,890	$	106,106	$	249,196
Intercompany eliminations		(329)		(1,417)		—		(1,746)		(415)		(853)		—		(1,268)
Net sales		267,682		33,625		195,409		496,716		122,785		19,037		106,106		247,928

Cost of sales before intercompany eliminations		236,294		23,924		180,067		440,285		108,905		13,620		100,361		222,886
Intercompany eliminations		(260)		(991)		(495)		(1,746)		(377)		(558)		(333)		(1,268)
Cost of sales		236,034		22,933		179,572		438,539		108,528		13,062		100,028		221,618
Gross profit	$	31,648	$	10,692	$	15,837	$	58,177	$	14,257	$	5,975	$	6,078	$	26,310

For the three months ended ~~April 30,~~January 31, 2019 and 2018, ~~and 2017,~~ inter-segment sales and cost of sales of ~~$0.2 million between Fresh products and RFG were eliminated. For the six months ended April 30, 2018 and 2017, inter-segment sales and cost of sales of $0.6~~$0.5 million and ~~$0.3~~$0.4 million between Fresh products and RFG were eliminated. For the three months ended ~~April 30,~~January 31, 2019 and 2018, ~~and 2017,~~ inter-segment sales and cost of sales of ~~$0.8~~$1.0 million and ~~$0.6~~$0.9 million between Calavo Foods and RFG were eliminated. For the ~~six~~three months ended ~~April 30, 2018~~January 31, 2019 and ~~2017, inter-segment sales and cost of~~

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~~sales of $1.6 million and $1.4 million between Calavo Foods and RFG were eliminated. For the six months ended April 30,~~ 2018, inter-segment sales and cost of sales of $0.1 million between Fresh products and Calavo Foods were eliminated.

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3.Inventories

Inventories consist of the following (in thousands):


	April 30,		October 31,		January 31,		October 31,
	2018		2017		2019		2018

Fresh fruit	$	21,430	$	14,566	$	14,921	$	12,902
Packing supplies and ingredients		9,903		9,755		11,871		10,889
Finished prepared foods		7,825		6,537		11,671		11,253
	$	39,158	$	30,858	$	38,463	$	35,044

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. No additional inventory reserve was considered necessary as of ~~April 30, 2018. We recorded a write down of $0.4 million to adjust our fresh fruit inventory to the lower of cost or net realizable value as of~~January 31, 2019 and October 31, ~~2017.~~2018.

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. For the three months ended January 31, 2019, we did not procure any avocados from entities owned or controlled by members of our Board of Directors. During the three months ended ~~April 30,~~January 31, 2018, ~~and 2017,~~ the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was ~~$1.9 million and $4.7~~$0.1 million. During the six months ended April 30, 2018 and 2017, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $2.0 million and $5.2 million. Amounts payable to these Board members were $1.0 million as of April 30, 2018. We did not have any amounts payable to these Board members as of January 31, 2019 and October 31, ~~2017.~~2018.

During the three months ended ~~April 30,~~January 31, 2019 and 2018, ~~and 2017,~~ we received $0.1 million as dividend income from Limoneira Company (Limoneira). ~~During the six months ended April 30, 2018 and 2017, we received $0.2 million as dividend income from Limoneira.~~ In addition, we lease office space from Limoneira ~~and~~for our corporate office. We paid ~~rental expenses of~~to rent expense to Limoneira totaling $0.1 million for ~~each of~~ the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017.~~2018. Harold Edwards, who is a member of our Board of Directors, is the Chief Executive Officer of Limoneira Company. ~~We have a 12%~~As of January 31, 2019, we own less than 10% ownership interest in Limoneira. ~~Additionally,~~Effective December 2018, our Chief Executive Officer ~~is a member of the Limoneira~~retired from Limoneira’s 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 ~~April 30,~~January 31, 2019 and 2018, ~~and 2017,~~ Calavo Growers, Inc. paid fees totaling less than $0.1 million to TroyGould PC. ~~During each of the six months ended April 30, 2018 and 2017, Calavo Growers, Inc. paid fees totaling $0.1 million to TroyGould PC.~~

In ~~December 2014, Calavo formed a wholly owned~~January 2016, our unconsolidated 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. Pursuant to a management service agreement, Belo, 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~~totaling $4.5 million with Bank of America, N.A. (BoA). This entity is accounted for using the equity method. These proceeds ~~of which~~ were used by Don Memo to repay debt owed to Calavo.

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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~~guaranteed and ~~promises~~promised 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. In December 2018, Don Memo received third party financing and repaid its loan to BoA, and as a result, we were able to remove this guarantee to BoA.

As of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017,~~2018, we ~~have~~had an investment of ~~$4.9~~$5.4 million and ~~$4.6~~$5.2 million, representing Calavo Sub’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 ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017,~~2018, we had outstanding advances of ~~$2.5~~$2.0 million and ~~$1.6~~$2.5 million to Don Memo. During the three months ended ~~April 30,~~January 31, 2019 and 2018, we recorded ~~$0.1~~$5.7 million and $3.7 million of ~~expenses to Don Memo pursuant to our consignment agreement. During the six months ended April 30, 2018 and 2017, we recorded $3.8 million and $0.7 million~~cost of ~~expenses~~sales to Don Memo pursuant to our consignment agreement.

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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 oftotaling $4.0 million as of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017,~~2018, which are netted against the grower payable. In addition, we had infrastructure advances due from Belher of ~~$0.6~~$3.4 million as of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017. Of~~2018. $0.8 million of these infrastructure advances ~~$0.2 million was~~were recorded as a receivable in prepaid and other current assets. The remaining ~~$0.4~~$2.6 million of these infrastructure advances ~~are~~were recorded in other assets. During the three months ended ~~April 30,~~January 31, 2019 and 2018, ~~and 2017,~~ we recorded ~~$6.7~~$5.3 million and ~~$9.4~~$5.9 million of ~~expenses to Belher pursuant to our consignment agreement. During the six months ended April 30, 2018 and 2017, we recorded $12.6 million and $13.1 million~~cost of ~~expenses~~sales to Belher pursuant to our consignment agreement.

In August 2015, we entered into Shareholder’s Agreement with various 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. ~~This~~As of January 31, 2019, this entity iswas approximately 83% owned by Calavo and iswas consolidated in our financial statements. Avocados de Jalisco built a packinghouse located in Jalisco, Mexico, ~~and such packinghouse has begun~~which began operations in June of 2017. As of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017,~~2018, we have made preseason advances of approximately $0.1 million to various partners of Avocados de Jalisco. During the ~~six~~three months ended ~~April 30,~~January 31, 2019 and 2018, we purchased approximately $1.0 million and $0.2 million of avocados from the partners of Avocados de Jalisco. In January 2018, we transferred $1.0 million of interest to the Avocados de Jalisco noncontrolling members.

As of ~~April 30,~~January 31, 2019 and October 31, 2018, we had an investment of $13.1 million and $19.9 million in FreshRealm, LLC (“FreshRealm”). We record the amount of our investment in FreshRealm in “Investment in unconsolidated entities” on our Consolidated Condensed Balance Sheets and recognize losses in FreshRealm in “Income/ (loss) in unconsolidated entities” in our Consolidated Condensed Statement of Income. See Note 13 for additional information.

Effective July 31, 2018, we entered into a Note and Membership Unit Purchase Agreement (“NMUPA”) with FreshRealm, pursuant to which we agreed to provide additional financing, subject to certain terms and conditions. Pursuant to such NMUPA, we entered into a Subscription Agreement, whereby we purchased $3.5 million of equity units in FreshRealm, on July 31, 2018. FreshRealm concurrently entered into subscription agreements with certain third-party investors for an additional $3.5 million of equity investments. As of January 31, 2019, our ownership percentage in FreshRealm was approximately 37%.

Additionally, pursuant to the NMUPA, we entered into a $12 million Senior Promissory Note and corresponding Security Agreement (collectively, the “Agreements”) with FreshRealm, effective August 10, 2018. We funded $9 million of this loan commitment during the fourth quarter of fiscal 2018 and funded the remaining loan commitment amount of $3 million during the first quarter of fiscal 2019. During our second quarter of fiscal 2019, we amended this note, due October 31, 2019, and, among other things, included a provision whereby we have the option to extend repayment of this note to November 1, 2020.

We also loaned FreshRealm an additional $7.5 million, in several unsecured notes during our first quarter of fiscal 2019. During our second fiscal quarter of 2019, we consolidated those notes into one $7.5 million note receivable balance due from FreshRealm, due October 31, 2019. Similar to the amended note described above, we included a provision whereby we have the option to extend repayment of this note to November 1, 2020. Also, during our fiscal second quarter, we lent an additional $1.5 million on an unsecured basis to FreshRealm. As of January 31, 2019 and October 31, 2018, we have ~~an approximate 38% ownership interest in~~note receivables from FreshRealm ~~LLC (FreshRealm).~~ totaling $19.9 million and $9.0 million. See Note 13 for further information.

Three officers and five members of our board of directors have investments in FreshRealm. In addition, as of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017,~~2018, we have a loan to FreshRealm members of approximately $0.2 million and $0.3 million. ~~In April 2017, FreshRealm initiated another round of financing. From April 2017 to October 2017, we 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. In the second quarter of fiscal 2018, two of our non-executive directors invested $1.2 million into FreshRealm.

In the first quarter of fiscal 2019, FreshRealm entered into a supply contract with a large multi-national, multi-channel retailer. Calavo co-signed an addendum to this agreement to provide assurance to the customer that Calavo will

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assume responsibility for performance, in the event that FreshRealm cannot perform, provided that the customer must work in good faith to make reasonable adjustments to logistical elements in the contract, if requested by Calavo.

We provide storage services to FreshRealm from our New Jersey and Texas Value-Added Depots, and our RFG Riverside facility. We have received ~~less than~~ $0.1 million in storage services revenue from FreshRealm in the three months ended ~~April 30, 2018. We have received $0.1 million in storage services revenue from FreshRealm in the six months ended April 30,~~January 31, 2019 and 2018. For the three months ended ~~April 30,~~January 31, 2019 and 2018, ~~and 2017,~~ RFG has sold ~~$2.4~~$1.6 million and ~~$1.9 million of products to FreshRealm. For the six months ended April 30, 2018 and 2017, RFG has sold $3.9 million and $2.9~~$1.5 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. ~~As of April 30, 2018, THNC owes us $0.2 million related to tenant improvements.~~ See the following tables for the related party activity for the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017:~~2018:

~~Table of Contents~~


	Three months ended April 30,				Three months ended January 31,
(in thousands)	2018		2017		2019		2018
Rent paid to LIG	$	139	$	135	$	139	$	139
Rent paid to THNC, LLC	$	199	$	131	$	198	$	199

Six months ended April 30,

(in thousands)

2018

2017

Rent paid to LIG

$
278

$
269

Rent paid to THNC, LLC

$
398

$
261

5.Other assets

Other assets consist of the following (in thousands):


	April 30,		October 31,		January 31,		October 31,
	2018		2017		2019		2018
Intangibles, net	$	1,664	$	2,226	$	833	$	1,109
Mexican IVA (i.e. value-added) taxes receivable		20,715		18,174
Mexican IVA (i.e. value-added) taxes receivable (see note 11)						24,042		21,859
Infrastructure advance to Agricola Belher		400		400		2,600		2,600
Loan to FreshRealm members		158		315
Notes receivable from San Rafael		268		493		—		39
Other		1,125		1,183		1,571		1,423
	$	24,330	$	22,791	$	29,046	$	27,030

Intangible assets consist of the following (in thousands):


		April 30, 2018						October 31, 2017							January 31, 2019						October 31, 2018
	Weighted-	Gross				Net		Gross				Net		Weighted-	Gross				Net		Gross				Net
	Average	Carrying		Accum.		Book		Carrying		Accum.		Book		Average	Carrying		Accum.		Book		Carrying		Accum.		Book
	Useful Life	Value		Amortization		Value		Value		Amortization		Value		Useful Life	Value		Amortization		Value		Value		Amortization		Value
Customer list/relationships	8.0 years	$	7,640	$	(6,643)	$	997	$	7,640	$	(6,181)	$	1,459	8.0 years	$	7,640	$	(7,336)	$	304	$	7,640	$	(7,106)	$	534
Trade names	8.4 years		2,760		(2,604)		156		2,760		(2,529)		231	8.6 years		2,760		(2,705)		55		2,760		(2,672)		88
Trade secrets/recipes	9.3 years		630		(394)		236		630		(369)		261	9.3 years		630		(431)		199		630		(418)		212
Brand name intangibles	indefinite		275		—		275		275		—		275	indefinite		275		—		275		275		—		275
Intangibles, net		$	11,572	$	(9,908)	$	1,664	$	11,572	$	(9,346)	$	2,226		$	11,305	$	(10,472)	$	833	$	11,305	$	(10,196)	$	1,109

We anticipate recording amortization expense of approximately ~~$0.6~~$0.4 million for the remainder of fiscal ~~2018, $0.7 million for fiscal year~~ 2019, $0.1 million for fiscal year 2020, $0.1 million for fiscal year 2021, $0.1 million for fiscal year 2022, and less than $0.1 million for thereafter, through fiscal year 2023.

See Note 11 for additional information related to Mexican IVA taxes.

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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. Up to 1,500,000 shares of common stock may be issued by Calavo under the 2011 Plan.

On January 2, ~~2018,~~2019, all 12 of our non-employee directors were granted 1,750 restricted shares each (total of 21,000 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.~~$71.56. On January 2, ~~2019,~~2020, as long as the directors are still serving on the board, these shares lose their restriction and become non-forfeitable and transferable. These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense for these grants was ~~$0.5~~$0.2 million for the three months ended

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~~April 30, 2018. The total recognized stock-based compensation expense for these grants was $0.6 million for the six months ended April 30, 2018.~~ January 31, 2019.

On December ~~18, 2017,~~14, 2018, our executive officers were granted a total of ~~25,241~~14,522 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.~~$85.67. These shares vest in one-third increments, on an annual basis, beginning December ~~18, 2018.~~14, 2019. These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense for these grants was ~~$0.2~~$0.1 million for the three months ended ~~April 30, 2018. The total recognized stock-based compensation expense for these grants was $0.3 million for the six months ended April 30, 2018.~~

~~On October~~January 31, 2017, a member of the management team at RFG resigned. His unvested portion of restricted stock issued in December of 2016 and January of 2016 were forfeited. On January 25, 2018, in consideration of and in exchange for his forfeiture of restricted shares upon his resignation, the board of directors granted 10,788 shares of unrestricted stock, which immediately vested. The closing price of our stock on such date was $87.10. We recorded for this grant $0.8 million of stock-based compensation expense in our fiscal first quarter of 2018.

On February 2, 2017, our Vice President of the Foods Division retired 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 867 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 2018.2019.

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

Vested

(56)

$
54.27

Forfeited

(7)

$
52.69

Granted

47

$
80.20

Outstanding at April 30, 2018

87

$
68.08

$
8,105


		Weighted-Average		Aggregate
	Number of Shares	Grant Price		Intrinsic Value
Outstanding at October 31, 2018	85	$	68.82
Vested	(51)	$	70.48
Granted	35	$	77.33
Outstanding at January 31, 2019	69	$	71.74	$	5,321

The total recognized stock-based compensation expense for restricted stock was ~~$0.9~~$1.0 million and ~~$0.8~~$1.8 million for the three months ended ~~April 30, 2018~~January 31, 2019 and ~~2017. The total recognized stock-based compensation expense for restricted stock was $1.8 million and $1.5 million for the six months ended April 30, 2018 and 2017.~~2018. Total unrecognized stock-based compensation expense totaled ~~$4.8 million and $3.0~~$4.7 million as of ~~April 30, 2018 and October~~January 31, ~~2017,~~2019, and will be amortized through fiscal year ~~2020.~~2021.

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 grant 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 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):

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Weighted-Average

Aggregate

Number of Shares

Exercise Price

Intrinsic Value

Outstanding at October 31, 2017

7

$
18.54

Exercised

(3)

$
17.66

Outstanding at April 30, 2018

4

$
19.20

$
374

Exercisable at April 30, 2018

4

$
19.20

$
374


		Weighted-Average		Aggregate
	Number of Shares	Exercise Price		Intrinsic Value
Outstanding at October 31, 2018	4	$	19.20
Outstanding at January 31, 2019	4	$	19.20	$	370
Exercisable at January 31, 2019	4	$	19.20	$	370

At ~~April 30, 2018,~~January 31, 2019, outstanding and exercisable stock options had a weighted-average remaining contractual term of ~~1.8~~1.1 years. The total recognized and unrecognized stock-based compensation expense was insignificant for the three months ended ~~April 30, 2018.~~January 31, 2019.

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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, 2017

20

$
40.07

Outstanding at April 30, 2018

20

$
40.07

$
1,068

Exercisable at April 30, 2018

12

$
29.01

$
773


		Weighted-Average		Aggregate
		Exercise		Intrinsic
	Number of Shares	Price		Value
Outstanding at October 31, 2018	20	$	40.07
Exercised	(2)	$	23.48
Outstanding at January 31, 2019	18	$	41.91	$	710
Exercisable at January 31, 2019	12	$	25.10	$	675

At ~~April 30, 2018,~~January 31, 2019, outstanding and exercisable stock options had a weighted-average remaining contractual term of ~~4.7~~4.4 years. The total recognized and unrecognized stock-based compensation expense was insignificant for the three months ended ~~April 30, 2018.~~January 31, 2019.

7.Other events

Dividend payment

On December ~~8, 2017,~~7, 2018, we paid a ~~$0.95~~$1.00 per share dividend in the aggregate amount of ~~$16.7~~$17.6 million to shareholders of record on November ~~17, 2017.~~16, 2018.

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. The final court approval is scheduled for August 2018 for the aforementioned settlement agreement and there will be 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

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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”)~~(VAT). During our fourth fiscal quarter of 2016, we provided a written rebuttal to MFM’s preliminary observations and requested the adoption of a conclusive agreement before the PRODECON (Local Tax Ombudsman) so that a full discussion of the case between us, the MFM and the PRODECON, as appropriate, can lead to a reconsideration 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, the initial PRODECON process concluded. In April 2018, we filed a second formal agreement before the PRODECON, so that we can continue the discussion of the case between us, the MFM and the PRODECON. During this meeting and discussion period, the statutory period that MFM has in order to issue the tax assessment has been suspended. Currently, we are waiting for the response of the MFM and the PRODECON regarding our next meeting date. We believe we have the legal arguments 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 examination related to fiscal year 2013. In January 2017, we received preliminary observations from SAT outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers, and VAT. We provided a written rebuttal to these preliminary ~~observation~~observations during our second fiscal quarter of 2017, which the SAT is in process of analyzing. During 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. During this meeting and

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discussion period, the statutory period that SAT had in order to issue the tax assessment was suspended. During our first fiscal quarter of 2018, we had an initial meeting with officials from the SAT and the PRODECON, which led to a further exchange of supporting information and documentation. ~~We expect that~~Although several ~~formal~~ meetings ~~between us,~~and discussions with the PRODECON and the SAT ~~and~~were conducted during our fiscal third quarter of 2018, we were unable to materially resolve our case with the SAT through the PRODECON ~~will be required before~~process.

As a result, on July 12, 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $2.62 billion Mexican pesos related to Income Tax, Flat Rate Business Tax, and Value Added Tax, related to this fiscal 2013 tax audit. Additionally, the tax authorities have determined an employee’s profit sharing liability, totaling approximately $118 million Mexican pesos as well.

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 this tax assessment is without merit. In August 2018, we filed an administrative appeal on the 2013 Assessment. The filing of an administrative appeal in Mexico is a process in which the taxpayer appeals to a different office within the Mexican tax authorities forcing the legal office within the SAT ~~will reach~~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 ~~conclusion. Note~~favorable or just resolution. Here, CDM has appealed our case to the SAT’s central legal department in Mexico City. Furthermore, in August 2018, we received a favorable ruling from the SAT’s central legal department in Mexico City on another tax matter (see footnote 11 regarding VAT refunds) indicating that ~~during~~they believe that our legal interpretation is accurate on a matter that is also central to the ~~meeting and discussion process,~~2013 Assessment. We believe this recent ruling significantly undermines the ~~fiscal year~~ 2013 ~~final assessment (previously expected no later September 2017) has been suspended.~~Assessment we received in July 2018.

We continue to believe that the ultimate resolution of these matters is unlikely to have a material effect on our consolidated financial position,, results of operations and cash flows.

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).

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The following table sets forth our financial assets and liabilities as of ~~April 30, 2018~~January 31, 2019 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		Level 1		Level 2		Level 3		Total
	(All amounts are presented in thousands)								(All amounts are presented in thousands)
Assets at Fair Value:
Investment in Limoneira Company(1)	$	40,241		—		—	$	40,241	$	36,951		-		-	$	36,951
Total assets at fair value	$	40,241		—		—	$	40,241	$	36,951		-		-	$	36,951

(1) The investment in Limoneira Company consists of marketable securities in the Limoneira Company stock. We currently own ~~approximately 12%~~less than 10% of Limoneira’s outstanding common stock. These securities are measured at fair value using quoted market prices. ~~Limoneira’s stock price at April 30, 2018 and October~~For the three months ended January 31, ~~2017 equaled $23.28 per share and $23.35 per share. Unrealized~~2019 we recognized a loss of $4.5 million on the consolidated condensed statement of income. In the prior year, unrealized gains and losses ~~are~~were recognized through other comprehensive income. Unrealized investment holding ~~gains~~losses arising during the three months ended ~~April 30,~~January 31, 2018 and 2017 was $3.0 million and $6.4 million. Unrealized investment holding losses arising during the six months ended April 30, 2018 was $0.1 million. Unrealized investment holding gains arising during the six months ended April 30, 2017 was $1.7were $3.1 million.

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9.Noncontrolling interest

The following table reconciles shareholders’ equity attributable to noncontrolling interest related to Avocados de Jalisco (in thousands).

Three months ended April 30,

Avocados de Jalisco noncontrolling interest

2018

2017

Noncontrolling interest, beginning

$
1,867

$
934

Net loss attributable to noncontrolling interest of Avocados de Jalisco

(106)

(11)

Noncontrolling interest, ending

$
1,761

$
923

Six months ended April 30,

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

(256)

(39)

Noncontrolling interest, ending

$
1,761

$
923


	Three months ended		Three months ended
Avocados de Jalisco noncontrolling interest	January 31, 2019		January 31, 2018

Noncontrolling interest, beginning	$	1,748	$	1,016
Noncash transfer of noncontrolling interest		—		1,001
Net loss attributable to noncontrolling interest of Avocados de Jalisco		(6)		(150)
Noncontrolling interest, ending	$	1,742	$	1,867

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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 April 30,			Six months ended April 30,					Three months ended January 31,
	2018		2017		2018		2017		2019		2018
Numerator:
Net Income attributable to Calavo Growers, Inc.	$	14,122	$	12,945	$	21,261	$	18,194	$	4,487	$	7,139
Denominator:
Weighted average shares – Basic		17,481		17,426		17,472		17,402		17,500		17,446
Effect on dilutive securities – Restricted stock/options		99		113		89		84		58		79
Weighted average shares – Diluted		17,580		17,539		17,561		17,486		17,558		17,525
Net income per share attributable to Calavo Growers, Inc:
Basic	$	0.81	$	0.74	$	1.22	$	1.05	$	0.26	$	0.41
Diluted	$	0.80	$	0.74	$	1.21	$	1.04	$	0.26	$	0.41

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 receivable from the Mexican government.

As of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017,~~2018, CDM IVA receivables totaled ~~$22.2~~$24.0 million and ~~$19.5~~$21.9 million. Historically, CDM received IVA refund payments from the Mexican tax authorities on a timely basis. Beginning in fiscal 2014 and continuing into fiscal ~~2018,~~2019, 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 through regular administrative processes, but certain amounts may ultimately need to be recovered via legal means.

During the first quarter of fiscal 2017, 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 start~~started an administrative appeal for the IVA related to the request of the months of July, August and September of 2015 (the “2015 Appeal”) in order to assert its argument that CDM is properly documented and to therefore change the SAT’s internal assessment. In August 2018, we received a favorable ruling from the SAT’s central legal department in Mexico City on the 2015 Appeal indicating that they believe CDM’s legal interpretation of its declared tax structure is indeed accurate. While favorable on this central matter of CDMs declared tax structure, the ruling, however, still does not recognize the

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taxpayers right to a full refund for the IVA related to the months of July, August and September 2015. Therefore, CDM ~~expects~~may need to ~~have~~file a ~~resolution~~substance-over-form annulment suit in the Federal Tax Court to ~~this matter in fiscal 2018. As of April 30, 2018 and October 31, 2017, $20.7 million and $18.2 million of CDM~~recover its full refund for IVA ~~receivables were recorded in other assets.~~over the subject period.

In spite of the favorable ruling from the SAT’s central legal department in Mexico City, as discussed above, the local SAT office in Uruapan 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 in regards to our IVA refunds related to the months of January through June of 2013. CDM has strong arguments and supporting documentation to sustain its declared tax structure for IVA and income tax purposes. CDM started an administrative appeal for the IVA related to the request of the months of January, February of March of 2013 and for the period of April, May and June of 2013 our global tax law advisory firm with offices throughout Mexico is working in the administrative appeal through which CDM will challenge the determination made by the tax authorities, which must be filed no later than March 8, 2019.

We believe that our operations in Mexico are properly ~~documented~~documented. 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. ~~We will continue to monitor the collection of these receivables with our outside consultants.~~

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 the effects of tax legislation in the period in which the law is enacted.

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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.

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 iswas 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~~did not apply until our 2019 fiscal year. For fiscal 2018, ~~and effective in the first fiscal quarter,~~ the most significant impacts ~~include:~~included: 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. In the first quarter of fiscal 2018, we recorded $1.7 million in one-time, non-cash charges related to the revaluation of our net deferred tax assets (approximately $1.4 million) and the transition tax on the deemed repatriation of foreign earnings (approximately $0.3 million). For fiscal year 2018 we are estimating an effective consolidated rate of 26.0% based primarily on the blending of the historical federal corporate tax rate of 35% 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 of the impact of 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 charge 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.At January 31, 2019, the Company has completed its accounting for the tax effects of the 2017 Tax Cuts & Jobs Act and no material adjustments have been made on the provisional amounts recorded at January 31, 2018.

13. FreshRealm

Based on the NMUPA and related Agreements, as described in Note 4, we reconsidered whether FreshRealm is a variable interest entity (“VIE”). A VIE refers to a legal business structure in which an investor has a controlling interest in, despite not having a majority of voting rights; or a structure involving equity investors that do not have sufficient resources to support the ongoing operating needs of the business. Due primarily to FreshRealm utilizing substantially more debt to finance its activities, in addition to its existing equity, we continue to believe that FreshRealm should be considered a VIE. In evaluating whether we are the primary beneficiary of FreshRealm, we considered several factors,

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including whether we (a) have the power to direct the activities that most significantly impact FreshRealm’s economic performance and (b) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE. We were not the primary beneficiary of FreshRealm at January 31, 2019 because the nature of our involvement with the activities of FreshRealm does not give us the power to direct the activities that most significantly impact its economic performance. We do not have a future obligation to fund losses or debts on behalf of FreshRealm. We may, however, voluntarily contribute funds. In the accompanying statements of income, we have presented the income (loss) from unconsolidated entities, after the provision for income taxes for all periods presented.

We record the amount of our investment in FreshRealm, totaling $13.1 million at January 31, 2019, in “Investment in unconsolidated entities” on our Consolidated Condensed Balance Sheets and recognize losses in FreshRealm in “Income/(loss) in unconsolidated entities” on our Consolidated Condensed Statement of Income.

For the three months ended January 31, 2019, FreshRealm incurred losses totaling $11.4 million. Effective December 16, 2018, FreshRealm completed a “check the box” tax election to change their entity classification for tax purposes to that of a corporation. To effect this change, FreshRealm, among other things, amended its operating agreement to eliminate the appropriate language related to the flow-through tax consequences of its prior tax status (Seventh Amended and Restated LLC Agreement) and checked the appropriate box on Form 8832 which it then filed with the Internal Revenue Service (IRS). As a result, losses incurred by FreshRealm from November 1, 2018 to December 15, 2018 were recorded in accordance with FASB Accounting Standards Codification (“ASC”) 810, ASC 323, and ASC 970, which mandate that the recognition of losses for an unconsolidated subsidiary be handled in a manner consistent with cash distributions upon liquidation of the entity when such distributions are different than the investors percentage ownership. As such, we recorded 100% of FreshRealm’s losses from November 1, 2018 through December 15, 2018 totaling $4.2 million. Losses incurred by FreshRealm from December 16, 2018 to January 31, 2019 (after the change in tax status was effective) were recorded to reflect our proportionate share of FreshRealm losses. From December 16, 2018 to January 31, 2019, our ownership percentage was approximately 37% and accordingly, we recorded losses from December 16, 2018 through January 31, 2019 totaling $2.7 million. As a result of FreshRealm’s recent change in tax status (described above), future operating results for FreshRealm will be allocated to its owners based on ownership percentage.

As of January 31, 2019, and October 31, 2018, we have note receivables from FreshRealm totaling $19.9 million and $9.0 million. See Note 4 for further information.

In the first quarter of fiscal 2019, FreshRealm entered into a supply contract with a large multinational, multi-channel retailer. Calavo co-signed an addendum to this agreement to provide assurance to the customer that Calavo will assume responsibility for performance, in the event that FreshRealm cannot perform, provided that the customer must work in good faith to make reasonable adjustments to logistical elements in the contract, if requested by Calavo.

Except for the performance guarantee noted above (for which we are unable to quantify our current exposure, if any), our exposure to the obligations of FreshRealm is generally limited to our interests in it. We believe our maximum exposure to loss in FreshRealm is the carrying value of our investment and our loans to it, which totaled $13.1 million and $19.9 million, as of January 31, 2019. Our maximum exposure to loss could increase in the future if FreshRealm receives additional financing (i.e. equity or debt) from Calavo or any other investor/lender. We are under no obligation to provide FreshRealm additional financing.

Unconsolidated Significant Subsidiary

As described in footnote 4, we own approximately 37% of FreshRealm as of January 31, 2019 and October 31, 2018. In accordance with Rule 10-01(b)(1) of Regulation S-X, which applies for interim reports on Form 10-Q, we must determine if our unconsolidated subsidiaries are considered, “significant subsidiaries”. In evaluating our investments, there are two tests utilized to determine if our subsidiaries are considered significant subsidiaries: the income test and the investment test. Rule 10-01(b)(1) of Regulation S-X requires summarized income statement information of an unconsolidated subsidiary in an interim report if either of the two tests exceed 20%. Pursuant to Rule 10-01(b)(1) of Regulation S-X, this requires summarized income statement information of FreshRealm in our first fiscal quarter Form

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10-Q. As disclosed in our October 31, 2018 10-K, we still plan to file FreshRealm’s financial statements by April 1, 2019 as an amendment to our Form 10-K.

The following table shows summarized financial information for FreshRealm (in thousands):

Income Statement:


	Three months ended January 31,
	2019		2018

Net sales	$	8,888	$	5,034
Gross loss		(2,891)		(2,157)
Selling, general and administrative		(6,003)		(3,952)
Other		(2,484)		(279)
Net loss	$	(11,378)	$	(6,388)

14. Revenue recognition

Effective at the beginning of our fiscal 2019, the Company adopted Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers," and all the related amendments (Accounting Standards Codification (ASC) 606) using the modified retrospective method of adoption. ASC 606 consists of a comprehensive revenue recognition standard, which requires the recognition of revenue when control of promised goods are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled.

The Company recognizes revenue when obligations under the terms of a contract with its customer are satisfied; generally, this occurs with the transfer of control of its products. Revenue is measured as the amount of net consideration expected to be received in exchange for transferring products. Revenue from product sales is governed primarily by customer pricing and related purchase orders (“contracts”) which specify shipping terms and certain aspects of the transaction price including rebates, discounts and other sales incentives. Contracts are at standalone pricing. The performance obligation in these contracts is determined by each of the individual purchase orders and the respective stated quantities, with revenue being recognized at a point in time when obligations under the terms of the agreement are satisfied. This generally occurs with the transfer of control of our products to the customer and the product is delivered. The Company's customers have an implicit and explicit right to return non-conforming products. A provision for payment discounts and product return allowances, which is estimated, is recorded as a reduction of sales in the same period that the revenue is recognized.

Sales Incentives and Other Promotional Programs

The Company routinely offers sales incentives and discounts through various regional and national programs to our customers and consumers. These programs include product discounts or allowances, product rebates, product returns, one-time or ongoing trade-promotion programs with customers and consumer coupon programs that require the Company to estimate and accrue the expected costs of such programs. The costs associated with these activities are accounted for as reductions to the transaction price of the Company’s products and are, therefore, recorded as reductions to gross sales at the time of sale. The Company bases its estimates of incentive costs on historical trend experience with similar programs, actual incentive terms per customer contractual obligations and expected levels of performance of trade promotions, utilizing customer and sales organization inputs. The Company maintains liabilities at the end of each period for the estimated incentive costs incurred but unpaid for these programs. Differences between estimated and actual incentive costs are generally not material and are recognized in earnings in the period such differences are determined. Reserves for product returns, accrued rebates and promotional accruals are included in the condensed consolidated balance sheets as part of accrued expenses.

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Principle vs. Agent Considerations

We frequently enter into consignment arrangements with avocado and tomato growers and packers located outside of the U.S. and growers of certain perishable products in the U.S. We evaluated whether its performance obligation is a promise to transfer services to the customer (as the principal) or to arrange for services to be provided by another party (as the agent) using a control model. This evaluation determined that the Company is in control of establishing the transaction price, managing all aspects of the shipments process and taking the risk of loss for delivery, collection, and returns. Based on the Company’s evaluation of the control model, it determined that all of the Company’s major businesses act as the principal rather than the agent within their revenue arrangements and such revenues are reported on a gross basis.

Practical Expedients

The Company elected the following practical expedients upon its adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606).

•Shipping and handling costs- The company elected to account for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities rather than as a promised service.

•Measurement of transaction price- The Company has elected to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction and collected by the Company from a customer for sales taxes.

•Contract costs- The Company has elected to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period is one year or less.

The adoption of ASC 606 did not have an impact on our consolidated results of operations for the three months ended January 31, 2019.

15. Amendment to Credit Agreement

Effective March 1, 2019, we entered into a Second Amendment to Credit Agreement (the “Second Amendment”) with Farm Credit West, PCA, and Bank of America, N.A., relating to our Credit Agreement dated as of June 14, 2016 and the First Amendment to Credit Agreement dated as of August 29, 2016. The Second Amendment, among other things, excludes financial results of FreshRealm from Calavo’s financial reporting requirements and covenant calculations and provides flexibility in making investments in joint ventures and non-wholly owned subsidiaries of Calavo.

16. Sale of Temecula, California Packinghouse

In January 2019, we entered into an agreement to sell our Temecula, California packinghouse for $7.1 million in cash and, concurrently, leaseback a portion of the facility representing approximately one-third of the total square footage. The contract is subject to terms that are usual and customary for real estate sales of this nature and is expected to close during our second fiscal quarter of 2019.

Included in our Property, Plant and Equipment is our Temecula, California packinghouse that is currently being held-for-sale. The Net Book Value of this held-for-sale property is approximately $0.7 million.

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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the fiscal year ended October 31, ~~2017~~2018 of Calavo Growers, Inc. (we, Calavo, or the Company).

Recent Developments

Dividend payment

On December ~~8, 2017,~~7, 2018, we paid a ~~$0.95~~$1.00 per share dividend in the aggregate amount of ~~$16.7~~$17.6 million to shareholders of record on November ~~17, 2017.~~

16, 2018.

Litigation

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. During our third quarter of fiscal 2016, our wholly-owned subsidiary, Calavo de Mexico (“CDM”), received a written communication from the Ministry of Finance and Administration of the government of the State of Michoacan, Mexico (“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”). During our fourth fiscal quarter of 2016, we provided a written rebuttal to MFM’s preliminary observations and requested the adoption of a conclusive agreement before the PRODECON (Local Tax Ombudsman) so that a full discussion of the case between us, the MFM and the PRODECON, as appropriate, can lead to a reconsideration 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, the initial PRODECON process concluded. In April 2018, we filed a second formal agreement before the PRODECON, so that we can continue the discussion of the case between us, the MFM and the PRODECON. During this meeting and discussion period, the statutory period that MFM has in order to issue the tax assessment has been suspended. Currently, we are waiting for the response of the MFM and the PRODECON regarding our next meeting date. We believe we have the legal arguments and documentation to sustain the positions challenged by tax authorities.

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to fiscal year 2013. In January 2017, we received preliminary observations from SAT outlining certain proposed adjustments primarily related to intercompany funding deductions for services from certain vendors/suppliers and VAT. We provided a written rebuttal to these preliminary observation during our second fiscal quarter of 2017, which the SAT is in process of analyzing. During 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. During this meeting and discussion period, the statutory period that SAT had in order to issue the tax assessment was suspended. During our first fiscal quarter of 2018, we had an initial meeting with officials from the SAT and the PRODECON, which led to a further exchange of supporting information and documentation. ~~We expect that~~Although several ~~formal~~ meetings ~~between us,~~and discussions with the PRODECON and the SAT ~~and~~were conducted during our fiscal third quarter, we were unable to materially resolve our case with the SAT through the PRODECON ~~will be required before~~process.

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As a result, on July 12, 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $2.62 billion Mexican pesos related to Income Tax, Flat Rate Business Tax, and Value Added Tax, related to this fiscal 2013 tax audit. Additionally, the tax authorities have determined an employee’s profit sharing liability totaling approximately $118 million Mexican pesos as well.

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 this tax assessment is without merit. In August 2018, we filed an administrative appeal on the 2013 Assessment. The filing of an administrative appeal in Mexico is a process in which the taxpayer appeals to a different office within the Mexican tax authorities forcing the legal office within the SAT ~~will reach~~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 ~~conclusion. Note~~favorable or just resolution. Here, CDM has appealed our case to the SAT’s central legal department in Mexico City. Furthermore, in August 2018, we received a favorable ruling from the SAT’s central legal department in Mexico City on another tax matter (see footnote 11 regarding VAT refunds) indicating that ~~during~~they believe our legal interpretation is accurate on a matter that is also central to the ~~meeting and discussion process,~~2013 Assessment. We believe this recent ruling significantly undermines the ~~fiscal year~~ 2013 ~~final assessment (previously expected no later September 2017) has been suspended.~~Assessment we received in July 2018.

We continue to believe that the ultimate resolution of these matters is unlikely to have a material effect on our consolidated financial position,, results of operations and cash flows.

Unrealized and realized net loss on Limoneira Stock

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 fiscal years and interim period within those fiscal years beginning after December 15, 2017. We adopted this new standard at the beginning of fiscal 2019. With the adoption of this new standard, we reclassed $12.1 million in accumulated other comprehensive income to retained earnings as of November 1, 2018. Additionally, for the three months ended January 31, 2019, we sold 51,271 shares of Limoneira stock and recorded a loss of $0.1 million in our consolidated statements of income. Limoneira’s stock price at January 31, 2019 and October 31, 2018 equaled $22.03 per share and $24.65 per share. Our remaining shares of Limoneira stock, totaling 1,677,299 at January 31, 2019, were revalued at $22.03 per share and we recorded a loss of $4.4 million in our consolidated statements of income.

Second Amendment to Credit Agreement

Sale of Temecula, California Packinghouse

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Net Sales

The following table summarizes our net sales by business segment for each of the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017:~~2018:


	Three months ended April 30,								Six months ended April 30,								Three months ended January 31,
	2018			Change		2017			2018			Change		2017			2019			Change		2018

Net sales:
Fresh products	$	137,935		(11.4)	%	$	155,623		$	260,720		(2.6)	%	$	267,682		$	116,854		(4.8)	%	$	122,785
Calavo Foods		21,913		30.1	%		16,837			40,950		21.8	%		33,625			22,114		16.2	%		19,037
RFG		104,557		7.0	%		97,702			210,663		7.8	%		195,409			119,064		12.2	%		106,106
Total net sales	$	264,405		(2.1)	%	$	270,162		$	512,333		3.1	%	$	496,716		$	258,032		4.1	%	$	247,928

As a percentage of net sales:
Fresh products		52.2	%				57.6	%		50.9	%				53.9	%		45.3	%				49.5	%
Calavo Foods		8.3	%				6.2	%		8.0	%				6.8	%		8.6	%				7.7	%
RFG		39.5	%				36.2	%		41.1	%				39.3	%		46.1	%				42.8	%
		100.0	%				100.0	%		100.0	%				100.0	%		100.0	%				100.0	%

Summary

Net sales for the three months ended ~~April 30, 2018,~~January 31, 2019, compared to the corresponding period in fiscal ~~2017, decreased~~2018, increased by ~~$5.8~~$10.1 million, or approximately 2.1%. The decrease in sales, when compared to the same corresponding prior year periods, was primarily related to the decline in the fresh segment, partially offset by gains in Calavo Foods and RFG. Net sales for the six months ended April 30, 2018, compared to the corresponding period in fiscal 2017, increased by $15.6 million, or approximately 3.1%4%. The increase in sales, when compared to the same corresponding prior year periods, was primarily related to ~~the growth~~gains in ~~the~~ Calavo Foods and RFG, ~~segments.~~partially offset by a decline in the Fresh products segment.

For ~~both~~ the quarter ~~and the six months~~ ended ~~April 30, 2018,~~January 31, 2019, Calavo Foods had our largest percentage increases in sales, followed by our RFG segment. Our Fresh product segment ~~which was offset by a decrease in our Fresh products segment,~~decreased, as shown above. The increase in Calavo Foods sales was due primarily to increased sales of our prepared avocado ~~products, which was partially offset by decreased sales of salsa~~ products. The increase in RFG sales was due primarily to increased sales from ~~fresh prepared food,~~ fresh-cut fruit & vegetables and ~~vegetable~~prepared foods products. The decrease in Fresh products sales was due primarily to ~~decreased~~a decrease in the sales price of avocados. 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 fruit sourced in any particular quarter. All intercompany sales are eliminated in our consolidated results of operations.

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Fresh products

~~Second~~First Quarter ~~2018~~2019 vs. ~~Second~~First Quarter ~~2017~~2018

Net sales delivered by the Fresh products business decreased by approximately ~~$17.7~~$5.9 million, or ~~11.4%~~5%, for the ~~second~~first quarter of fiscal ~~2018,~~2019, when compared to the same period for fiscal ~~2017.~~2018. This decrease in Fresh product sales during the ~~second~~first quarter of fiscal ~~2018~~2019 was primarily related to decreased sales of avocados, ~~and tomatoes.~~as higher sales volumes were more than offset by lower sales prices.

Sales of avocados decreased ~~$15.4~~$5.4 million, or ~~10.8%~~5%, for the ~~second~~first quarter of 2018, when compared to the same prior year period. This decrease in avocado sales was primarily due to a 20% decrease in the average sales price per carton. The decrease in sales price was partially offset by a 9.3 million pound, or 11%, increase in the volume of avocados sold during the quarter.

Sales of tomatoes decreased to $7.7 million for the second quarter of fiscal 2018, compared to $11.0 million for the same period for fiscal 2017. The decrease in sales for tomatoes is primarily due to an approximately 34% decrease in the volume of cartons sold, which was partially offset by an increase in the average sales price per carton.

~~Six Months Ended 2018 vs. Six Months Ended 2017~~

Net sales delivered by the Fresh products business decreased by approximately $7.0 million, or 2.6%, for the six months ended 2018, when compared to the same period for fiscal 2017. This decrease in Fresh product sales during the six months ended 2018 was primarily related to decreased sales of avocados, partially offset by an increased sales in tomatoes.

~~Sales of avocados decreased $11.6 million, or 4.7%, for the six months ended April 30, 2018,~~2019, when compared to the same prior year period. This decrease in avocado sales was primarily due to a 11% decrease in the average sales price per ~~carton,~~carton. We attribute much of this change in price to a higher overall supply of avocados in the market during the first quarter of fiscal 2019. The decrease in sales price was partially offset by ~~11.6~~a 5.7 million ~~pounds,~~pound, or ~~a 7.4%~~7%, increase in the volume of avocados sold during the ~~year.~~

Sales of tomatoes increased to $19.5 million for the six months ended April 30, 2018, compared to $16.2 million for the same period for fiscal 2017. The increase in sales for tomatoes is primarily due to an approximately 29% increase in the average sales price per carton, partially offset by 6% decrease in the volume of cartons sold.

~~Calavo Foods~~

~~Second Quarter 2018 vs. Second Quarter 2017~~

Sales for Calavo Foods for the quarter ended April 30, 2018, when compared to the same period for fiscal 2017, increased $5.1 million, or 30.1%. Sales of prepared avocado products increased by approximately $5.3 million, or 33.3%, for the quarter ended April 30, 2018, when compared to the same prior year period, resulting from increases in both the average sales price per pound and the total volume of pounds sold during the quarter. Partially offsetting this gain were sales of salsa products, which decreased by approximately $0.2 million during the quarter.

~~Six Months Ended 2018 vs. Six Months Ended 2017~~

Sales for Calavo Foods for the six months ended April 30, 2018, when compared to the same period for fiscal 2017, increased $7.3 million, or 21.8%. Sales of prepared avocado products increased by approximately $7.8 million, or 24.5%, for the six months ended April 30, 2018, when compared to the same prior year period, resulting from increases in both the average sales price per pound and the total volume of pounds sold. Partially offsetting this gain were sales of salsa products, which decreased by approximately $0.4 million during the year.

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Calavo Foods

First Quarter 2019 vs. First Quarter 2018

Sales for Calavo Foods for the quarter ended January 31, 2019, when compared to the same period for fiscal 2018, increased $3.1 million, or 16%. Sales of prepared avocado products increased by approximately $3.1 million, or 17%, for the quarter ended January 31, 2019, when compared to the same prior year period. This increase was the result of both an increase in the total volume of pounds sold and an increase in the average sales price per pound.

RFG

~~Second~~First Quarter ~~2018~~2019 vs. ~~Second~~First Quarter ~~2017~~2018

Sales for RFG for the quarter ended ~~April 30, 2018,~~January 31, 2019, when compared to the same period for fiscal ~~2017,~~2018, increased ~~$6.9~~$13.0 million, or ~~7.0%~~12%. The overall increase in sales is primarily due to higher sales volume from expanded retail partnerships in multiple geographies, most notably in a few regions in which the Company has added production capacity.

~~Six Months Ended 2018 vs. Six Months Ended 2017~~

~~Sales for RFG for the six months ended April 30, 2018, when compared~~This increase was partially offset by impacts related to the ~~same period~~FDA’s romaine lettuce advisory in November, as well as raw material challenges that constrained output for fiscal 2017, increased $15.3 million, or 7.8%. The overall increase in sales is primarily due to higher sales volume from expanded retail partnerships in multiple geographies, most notably in a few regions in which the Company has added production capacity. certain key products.

Gross Profit

The following table summarizes our gross profit and gross profit percentages by business segment for the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017:~~2018:


	Three months ended April 30,								Six months ended April 30,								Three months ended January 31,
	2018			Change		2017			2018			Change		2017			2019			Change		2018


Gross Profit:
Fresh products	$	15,120		(36.5)	%	$	23,797		$	29,377		(7.2)	%	$	31,648		$	20,790		45.8	%	$	14,257
Calavo Foods		7,552		34.9	%		5,600			13,527		26.5	%		10,692			6,432		7.6	%		5,975
RFG		9,297		35.6	%		6,856			15,375		(2.9)	%		15,837			3,615		(40.5)	%		6,078
Total gross profit	$	31,969		(11.8)	%	$	36,253		$	58,279		0.2	%	$	58,177		$	30,837		17.2	%	$	26,310

Gross profit percentages:
Fresh products		11.0	%				15.3	%		11.3	%				11.8	%		17.8	%				11.6	%
Calavo Foods		34.5	%				33.3	%		33.0	%				31.8	%		29.1	%				31.4	%
RFG		8.9	%				7.0	%		7.3	%				8.1	%		3.0	%				5.7	%
Consolidated		12.1	%				13.4	%		11.4	%				11.7	%		12.0	%				10.6	%

Summary

Our cost of goods sold consists predominantly of ingredient costs (primarily fruit and other whole foods), 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 ~~decreased~~increased by approximately ~~$4.3~~$4.5 million, or ~~11.8%~~17%, for the ~~second~~first quarter of fiscal ~~2018,~~2019, when compared to the same period for fiscal ~~2017.~~2018. The ~~decrease~~increase was primarily attributable to gross profit increases in our Fresh products and Calavo Foods segments, partially offset by a decrease in the ~~Fresh products segment, partially offset by an increase in our~~ RFG ~~segment and Calavo Foods~~ segment.

Fresh products

During our three months ended ~~April 30, 2018,~~January 31, 2019, as compared to the same prior year period, the ~~decrease~~increase in our Fresh products segment gross profit percentage was the result of ~~decreased~~increased profit for ~~avocados and tomatoes.~~avocados. For the ~~second~~first quarter ended ~~April 30, 2018,~~January 31, 2019, compared to the same prior year period, the gross profit percentage for avocados ~~decreased~~increased to ~~11.0%~~18.6% in ~~2018~~2019 from ~~15.8%~~11.7% in ~~2017.~~2018. The ~~decrease~~increase was primarily related to ~~the unusual market supply conditions experienced during the second quarter last year, as~~ our ~~level of profitability~~strength in ~~the second quarter of 2018 was otherwise strong in comparison to most other historical periods. Freight costs also increased compared to last year’s second quarter.~~ fresh avocado sourcing, production and

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sales management during the unusual market supply conditions experienced in the first quarter of fiscal 2019. In addition, the U.S. Dollar to Mexican Peso exchange rate was ~~weaker~~stronger in the ~~second~~first quarter ~~2018,~~2019, when compared to the same prior year period. Note that any significant fluctuations in the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross profits for our Fresh products segment.

~~For the~~Calavo Foods

The increase in Calavo Foods gross profit is due to increased sales volumes compared to prior year. Calavo Foods gross profit percentage decreased to 29.7% from 32.4% of net sales, during our three months ended April 30, 2018, we generated gross profit of $0.8 million from tomato sales, down from $1.2 million in the corresponding prior year period. The decrease in tomato gross profit was due primarily to the year-over-year reduction in sales described in more detail earlier.

~~During our six months ended April 30, 2018, as~~January 31, 2019 compared to the same prior year period, the decrease in our Fresh products segment gross profit percentage was the result of decreased profit for avocados, partially offset by an increase in tomatoes. For the six months ended April 30, 2018, compared to the same prior year period, the gross profit percentage for avocados decreased to 11.3% in 2018 from 12.3% in 2017. periods. The decrease during the six months of 2018 was primarily related to the unusual market supply conditions experienced last year and higher year-over-year freight costs. In addition, the U.S. Dollar to Mexican Peso exchange rate was weaker in the first six months of fiscal 2018, when compared to the same prior year period. Note that any significant fluctuations in the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross profits for our Fresh products segment.

For the six months ended April 30, 2018 we generated gross profit of $2.1 million from tomato sales, up from $1.3 million in the corresponding prior year period. The increase in tomato gross profit was due primarily to the year-over-year increase in sales described in more detail earlier.

~~Calavo Foods~~

~~Calavo Foods gross profit percentage increased for the three and six months ended April 30, 2018, when compared to the same periods for fiscal 2017. The increase~~ in Calavo Foods gross profit percentage was due primarily to increased gross profit of our prepared avocado products, which was partially offset by decreased gross profit of salsa products. The Calavo Foods segment gross profit percentage increased to 34.5% and 33.0% of net sales, during our three and six months ended April 30, 2018 compared to 33.3% and 31.8% during the same prior year periods. The increase was primarily due to a higher ~~volume of pounds sold and higher average selling price for prepared avocado products, partially offset by higher fruit costs and the impact of a weaker exchange rate on~~ production costs, ~~for the three and six months ended April 30, 2018, as compared~~mainly related to the ~~same prior year periods.~~increased use of third party copackers which management believes is necessary in order to continue to grow sales volumes. Note that any significant fluctuation in the cost of fruit used in the production process or the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross profit for our Calavo Foods segments.

RFG

RFG’s gross profit percentage for the quarter ended ~~April 30, 2018~~January 31, 2019 was ~~8.9%~~3.0%, compared to ~~7.0% in the same prior year period. RFG’s gross profit percentage for the six months ended April 30, 2018 was 7.3%, compared to 8.1%~~5.7% in the same prior year period. The gross profit ~~improvement~~decline in the ~~fiscal second quarter of 2018~~three months ended January 31, 2019, was due primarily to ~~manufacturing efficiencies generated~~raw material issues caused by inclement weather in key growing regions for several important commodities during the ~~most recent three months across the segment’s manufacturing footprint,~~quarter. This resulted in higher input prices, as well as ~~lower~~poor quality and yields, which required additional processing labor. Lower sales of certain items related to these raw material ~~costs. The lower~~challenges, as well as the FDA’s romaine lettuce advisory, also impacted total gross profit ~~for~~in the ~~six months ended April 30, 2018, as compared~~quarter. Further, RFG had approximately $0.3 million in pre-opening cost related to the ~~same prior year period, was due to~~new Pacific Northwest production facility during the ~~costs associated with newer facilities, including our Riverside facility and an unusual circumstance at our Houston facility (described more fully in our first quarter disclosure).~~

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quarter.

Selling, General and Administrative


	Three months ended April 30,								Six months ended April 30,								Three months ended January 31,
	2018			Change		2017			2018			Change		2017			2019			Change		2018
	(Dollars in thousands)								(Dollars in thousands)								(Dollars in thousands)
Selling, general and administrative	$	12,875		(16.5)	%	$	15,426		$	28,392		(2.9)	%	$	29,252		$	14,276		(8.0)	%	$	15,517
Percentage of net sales		4.9	%				5.7	%		5.5	%				5.9	%		5.5	%				6.3	%

Selling, general and administrative expenses of ~~$12.9~~$14.3 million for the three months ended ~~April 30, 2018~~January 31, 2019 include costs of marketing and advertising, sales expenses (including broker commissions) and other general and administrative costs. Selling, general and administrative expenses decreased ~~$2.6~~$1.2 million, or ~~16.5%~~8.0%, for the three months ended ~~April 30, 2018,~~January 31, 2019, when compared to the same period for fiscal ~~2017.~~2018. This decrease was primarily related to a decrease in accrued management bonuses (approximately $1.9 million) and a decrease in bad debt (approximately $1.4 million). Partially offsetting this decrease was an increase of salaries and benefits ($0.4$0.9 million of ~~costs~~senior management transition expenses recognized in the first quarter of fiscal 2018 related to the ~~vesting~~stock grant issued to two officers who retired, and $0.3 million of ~~stock grants earned by certain members~~lower broker commissions.

Income (loss) from unconsolidated entities


	Three months ended January 31,
	2019			Change		2018
	(Dollars in thousands)
Income (loss) from unconsolidated entities	$	(6,298)		(1,144.4)	%	$	603
Percentage of net sales		(2.4)	%				0.2	%

Income (loss) from unconsolidated entities includes our allocation of ~~the senior management team, as well as $0.2 million due~~earnings or losses from our investments in ~~part to higher head count) for~~FreshRealm and Don Memo. For the three months ended ~~April 30,~~January 31, 2019 and 2018, ~~when compared~~we recognized $0.6 million of income related to Don Memo. For the ~~same period for fiscal 2017.~~

~~Selling, general and administrative expenses of $28.4 million for the six~~three months ended ~~April 30, 2018 include costs of marketing and advertising, sales expenses (including broker commissions) and other general and administrative costs, as well as $0.9~~January 31, 2019, we recognized $6.9 million of management transition related expenses. Selling, general and administrative expenses decreased $0.9 million, or 2.9%, for the six months ended April 30, 2018, when compared to the same period for fiscal 2017. This decrease was primarilylosses related to FreshRealm. While we are unable to determine with certainty the future operating results of FreshRealm and future non-Calavo investments, if any, we anticipate recording additional non-cash losses from FreshRealm during the remainder of fiscal 2019. As a ~~decrease~~result of FreshRealm’s recent change in ~~accrued management bonuses (approximately $1.9 million) and a decrease in bad debt (approximately $1.4 million)~~tax status (described earlier), we expect that future operating results for FreshRealm will be allocated to its owners based on ownership percentage, (as of January 31,

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2019 our ownership was approximately 37%). ~~Partially offsetting this decrease was an increase in salaries and benefits ($1.6~~As of January 31, 2019, our total investment balance of approximately $13.1 million, ~~of costs~~plus $19.9 million related to the ~~vesting of stock grants earned by certain members of the senior management team over the past three fiscal years, as well as $0.9 million due~~Notes receivables. See Note 13 in ~~part to higher headcount)~~our consolidated financial statements for ~~the six months ended April 30, 2018, when compared to the same period for fiscal 2017.~~

~~Other Income (Expense), Net~~

Three months ended April 30,

Six months ended April 30,

2018

Change

2017

2018

Change

2017

(Dollars in thousands)
(Dollars in thousands)

Other income (expense), net

$
(26)

(178.8)
%
$
33

$
703

2,052.8
%
$
(36)


Percentage of net sales

(0.0)
%

0.0
%

0.1
%

(0.0)
%

Other income (expense), net includes income from unconsolidated subsidiaries, dividend income, as well as certain other transactions that are outside of the normal course of operations. The increase for the six months ended April 30, 2018, compared to the same prior year periods are primarily due to an increase of income from our unconsolidated subsidiary Don Memo (See Note 4 for further information).more information.

Provision for Income Taxes


	Three months ended April 30,								Six months ended April 30,								Three months ended January 31,
	2018			Change		2017			2018			Change		2017			2019			Change		2018

Provision for income taxes	$	4,764		(37.3)	%	$	7,603		$	9,066		(10.8)	%	$	10,164		$	1,533		(64.4)	%	$	4,302
Effective tax rate		25.4	%				37.0	%		30.1	%				35.9	%		25.5	%				38.1	%

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 the first quarter ended in fiscal 2019 and 2018, we recorded an income tax benefit of approximately $0.1 million and $0.4 million, pursuant to ASU 2016-09, Improvements to Employee Share-based Payment Accounting. In addition, in the first quarter of fiscal 2018, we recorded $1.7 million in one-time, non-cash charges related to the revaluation of our net deferred tax assets (approx. $1.4 million) and the transition tax on the deemed repatriation of foreign earnings (approx. $0.3 million). ~~In addition, we recorded an income tax benefit of approximately $0.4 million and $0.3 million for the first quarters ended in fiscal 2018 and 2017, respectively, pursuant to ASU 2016-09,~~ ~~Improvements to Employee Share-based Payment Accounting~~. We recognize the effects of tax legislation

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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.~~reverse based on the Tax Act and a change accelerating certain tax deductions on our 2017 federal tax return.

Liquidity and Capital Resources

Cash provided by operating activities was ~~$21.2~~$10.4 million for the ~~six~~three months ended ~~April 30, 2018,~~January 31, 2019, compared to cash provided by ~~operations~~operating activities of ~~$23.3~~$7.9 million for the similar period in fiscal ~~2017. Operating cash flows~~2018. Cash provided by operating activities for the ~~six~~three months ended ~~April 30, 2018~~January 31, 2019 reflect primarily our net income of ~~$21.0~~$4.5 million, non-cash activities (depreciation and amortization, ~~stock~~stock-based compensation expense, deferred taxes, ~~and~~ (loss)/income from unconsolidated ~~entities)~~entities and net losses on Limoneira shares) of ~~$10.5~~$15.2 million and a net decrease in the ~~non-cash~~ components of our operating capital of approximately ~~$10.3~~$9.3 million.

The working capital decrease ~~includes an increase in inventory of $8.3 million, a net decrease in accounts payable and accrued expenses of $8.1 million,~~results from an increase in accounts receivable of $7.2 million, a decrease in payable to growers of $3.8 million, an increase in inventory of $3.4 million, an increase in other assets of ~~$2.3~~$2.7 million, and an increase in prepaid expenses and other current assets of ~~$0.2~~$0.4 million, partially offset by ana net increase in accounts payable ~~to growers~~and accrued expenses of ~~$10.9 million, an increase in income taxes payable of $1.9~~$5.6 million, a decrease in advances to suppliers of ~~$1.6~~$1.2 million, ~~and~~ a decrease in income taxes receivable of ~~$1.4 million.~~$1.2 million and a decrease of $0.2 million in deferred rent.

The increase in our accounts receivable, as of January 31, 2019 when compared to October 31, 2018, primarily reflects higher sales recorded in the month of January 2019, as compared to October 2018. The decrease in ~~accounts~~ payable ~~and accrued expenses is~~to growers primarily ~~related to the payment of prior year’s performance bonuses.~~reflects a decrease in our Mexican avocado grower liability. The increase in inventory is primarily related to an increase in ~~the value~~prepared guacamole products for our Foods segment, higher volumes of ~~fresh fruit~~avocados on hand (partially offset by lower prices) and higher RFG inventories at April 30, 2018. This was primarily driven by an increase in the per unit value of inventory on hand and the volume of California avocados purchased during our second fiscal quarter of 2018, as compared to October 2017. The increase in our accounts receivable, as of April 30, 2018January 31, 2019 when compared to October 31, ~~2017, primarily reflects higher sales recorded in the month of April 2018, as compared to October 2017.~~2018. 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 increase in prepaids and other current assets is due primarily to increased Mexican IVA tax receivable. The increase in accounts payable ~~to growers~~and accrued expenses is primarily ~~reflects~~related to an increase in our ~~Mexican and Californian avocado grower liability.~~payables related to RFG. The increase in advances to suppliers primarily reflects more pre-season advances outstanding to our tomato growers in January 2019, compared to October 2018. 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 change in the tax rate due to the passage of the Tax Cuts and Jobs Act legislation that passed December 22, 2017. The decrease in advances to suppliers primarily reflects less pre-season advances outstanding to our tomato growers in April 2018, compared to October 2017.earnings.

Cash used in investing activities was ~~$8.6~~$13.1 million for the ~~six~~three months ended ~~April 30, 2018,~~January 31, 2019, which primarily related to loans to FreshRealm of $10.5 million, property, plant and equipment purchases of ~~$8.8~~$3.9 million, partially offset by proceeds received on the sales of Limoneira stock of $1.2 million and proceeds received from the repayment of the San Rafael note of $0.2 million. For the six months ended April 30, 2017, cash used for investing activities was $38.5 million, which primarily related to expansion projects for RFG segment (including more than $19 million for the purchase of the new Riverside plant) and for the Fresh segment, and an investment in FreshRealm of $4.6$0.1 million.

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Cash ~~used~~provided by financing activities was ~~$16.8~~$5.4 million for the ~~six~~three months ended ~~April 30, 2018,~~January 31, 2019, which related principally to the proceeds received on our credit facilities totaling $24.0 million, partially offset by the payment of our ~~$16.7~~$17.6 million dividend and the payment of minimum withholding taxes on net share settlement of equity awards of $1.2 million, and partially offset by receipts on our credit facilities totaling $1.0 million and proceeds received for exercise of stock options of $0.1 million. For the six months ended April 30, 2017, cash from financing activities was $11.8 million, which related principally to receipts on our credit facilities totaling $28.5 million, partially offset by the payment of our $15.7 million dividend and for the purchase of the noncontrolling interest of Salsa Lisa of $1.0 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. Cash and cash equivalents as of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017~~2018 totaled ~~$2.4~~$4.2 million and ~~$6.6~~$1.5 million. Our working capital at ~~April 30, 2018~~January 31, 2019 was ~~$24.7~~$24.9 million, compared to ~~$3.7~~$29.6 million at October 31, ~~2017.~~2018.

We believe that cash flows from operations and the available Credit Facility 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 evaluate 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 advanced funds for

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both working capital and long-term productive asset purchases. Total credit available under this agreement is $80 million, and will expire in June 2021. 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 agreement the weighted-average interest rate was ~~2.9%~~3.7% and ~~2.2%~~3.4% at ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017.~~2018. Under these credit facilities, we had ~~$21.0~~$39.0 million and ~~$20.0~~$15.0 million outstanding as ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017.~~ 2018.

This Credit Facility 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~~are in compliance with all such ~~covenants at April 30, 2018.~~covenants.

Contractual Obligations

There have been no material changes to our contractual commitments, from those previously disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, ~~2017.~~2018. For a summary of the contractual commitments at October 31, ~~2017,~~2018, see Part II, Item 7, in our 2017 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.

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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, 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 ~~April 30, 2018.~~January 31, 2019.


(All amounts in thousands)	Expected maturity date April 30,																Expected maturity date January 31,
	2019		2020		2021		2022		2023		Thereafter		Total		Fair Value		2020		2021		2022		2023		2024		Thereafter		Total		Fair Value
Assets
Cash and cash equivalents (1)	$	2,377	$	—	$	—	$	—	$	—	$	—	$	2,377	$	2,377	$	4,211	$	—	$	—	$	—	$	—	$	—	$	4,211	$	4,211
Accounts receivable (1)		76,925		—		—		—		—		—		76,925		76,925		73,323		—		—		—		—		—		73,323		73,323

Liabilities
Payable to growers (1)	$	27,373	$	—	$	—	$	—	$	—	$	—	$	27,373	$	27,373	$	10,247	$	—	$	—	$	—	$	—	$	—	$	10,247	$	10,247
Accounts payable (1)		16,420		—		—		—		—		—		16,420		16,420		16,917		—		—		—		—		—		16,917		16,917
Current borrowings pursuant to credit facilities (1)		21,000		—		—		—		—		—		21,000		21,000		39,000		—		—		—		—		—		39,000		39,000
Fixed-rate long-term obligations (2)		117		122		122		122		17		—		500		519		112		122		122		27		—		—		383		396

(1)

We believe the carrying amounts of cash and cash equivalents, accounts receivable, advances to suppliers, payable to growers, accounts payable, and current borrowings pursuant to credit facilities approximate their fair value due to the short maturity of these financial instruments.

(2)

Fixed-rate long-term obligations bear interest rates ranging from 4.0% to 4.3% with a weighted-average interest rate of 4.2%. We project the impact of an increase or decrease in interest rates of 100 basis points would result in a change of fair value of approximately ~~$11,000.~~$7,000.

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 affiliates~~Mexican-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~~gains for the three ~~and six~~ months ended ~~April 30, 2018,~~January 31, 2019, net of ~~gains,~~losses, was ~~$0.1 million and $0.3~~$0.2 million. Total foreign currency transaction ~~gains~~losses for the three ~~and six~~ months ended ~~April 30, 2017,~~January 31, 2018, net of losses, was $0.2 ~~million and $0.3~~ million.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective.

There were no changes in the Company’s internal control over financial reporting during the quarter ended ~~April 30, 2018~~January 31, 2019 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 that we do not believe will have a material adverse impact on our financial statements.

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~~See Note 7 in our consolidated financial statements for further information regarding legal proceedings.~~

ITEM 1A. RISK FACTORS

For a discussion of our risk factors, see Part 1, item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, ~~2017.~~2018. There have been no material changes from the risk factors set forth in such Annual Report on Form 10-K. However, the risks and uncertainties that we face are not limited to those set forth in the ~~2017~~2018 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock.

ITEM 6. EXHIBITS


	10.1	Amended and Restated Promissory Note.
	10.2	Fourth Amendment to Senior Promissory Note and Note and Membership Unit Purchase Agreement.
	10.3	FreshRealm Promissory Note.

10.4

Second Amendment to Credit Agreement.

10.5

FreshRealm Seventh and Restated LLC Agreement.

	31.1	Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
	101	The following financial information from the Quarterly Report on Form 10-Q of Calavo Growers, Inc. for the quarter ended ~~April 30, 2018,~~January 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017;~~2018; (2) Consolidated Condensed Statements of Income for the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017;~~2018; (3) Consolidated Condensed Statements of Comprehensive Income for the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017;~~2018; (4) Consolidated Condensed Statements of Cash Flows for the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017;~~2018; and (5) Notes to Unaudited Condensed Consolidated Financial Statements.

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INDEX TO EXHIBITS

Exhibit
Number		Description
10.1 10.2 10.3 10.4 10.5		Amended and Restated Promissory Note. Fourth Amendment to Senior Promissory Note and Note and Membership Unit Purchase Agreement. FreshRealm Promissory Note. Second Amendment to Credit Agreement. FreshRealm Seventh and Restated LLC Agreement.
31.1		Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
101		The following financial information from the Quarterly Report on Form 10-Q of Calavo Growers, Inc. for the quarter ended ~~April 30, 2018,~~January 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of ~~April 30, 2018~~January 31, 2019 and October 31, ~~2017;~~2018; (2) Consolidated Condensed Statements of Income for the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017;~~2018; (3) Consolidated Condensed Statements of Comprehensive Income for the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017;~~2018; (4) Consolidated Condensed Statements of Cash Flows for the three ~~and six~~ months ended ~~April 30, 2018~~January 31, 2019 and ~~2017;~~2018; and (5) Notes to Unaudited Condensed Consolidated Financial Statements.

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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.

ar
	Calavo Growers, Inc.
	(Registrant)


Date: ~~June 8, 2018~~March 7, 2019
	By	/s/ Lecil E. Cole
		Lecil E. Cole
		Chairman of the Board of Directors, President, and
		Chief Executive Officer
		(Principal Executive Officer)

Date: ~~June 8, 2018~~March 7, 2019
	By	/s/ B. John Lindeman
		B. John Lindeman
		Chief Financial Officer and Corporate Secretary
		(Principal Financial Officer)


	Three months ended April 30, 2018								Three months ended April 30, 2017

	Fresh		Calavo						Fresh		Calavo
	products		Foods		RFG		Total		products		Foods		RFG		Total

Avocados	$	127,743	$	—	$	—	$	127,743	$	142,933	$	—	$	—	$	142,933
Tomatoes		7,963		—		—		7,963		11,187		—		—		11,187
Papayas		2,852		—		—		2,852		1,955		—		—		1,955
Other fresh products		69		—		—		69		6		—		—		6
Prepared avocado products		—		25,235		—		25,235		—		19,265		—		19,265
Salsa		—		740		—		740		—		935		—		935
Fresh-cut fruit & vegetables and prepared foods		—		—		104,982		104,982		—		—		98,028		98,028
Total gross sales		138,627		25,975		104,982		269,584		156,081		20,200		98,028		274,309
Less sales incentives		(438)		(3,271)		(425)		(4,134)		(256)		(2,805)		(326)		(3,387)
Less inter-company eliminations		(254)		(791)		—		(1,045)		(202)		(558)		—		(760)
Net sales	$	137,935	$	21,913	$	104,557	$	264,405	$	155,623	$	16,837	$	97,702	$	270,162