|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) For the transition period from ______________________ to ______________________ |
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
|
|
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | |
Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
Registrant's number of shares of common stock outstanding as of January 31, 2022 was
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains statements relating to future events and results of Calavo Growers, Inc. and its consolidated subsidiaries (Calavo, the Company, we, us or our), including certain projections and business trends, that are forward-looking statements, as defined in the Private Securities Litigation and Reform Act of 1995, that involve risks, uncertainties and assumptions. These statements are based on our current expectations and are not promises or guarantees. If any of the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, gross profit, expenses, gain/(loss) on Limoneira shares, income/(loss) from unconsolidated entities, earnings, earnings per share, tax provisions, cash flows and currency exchange rates; the impact of COVID-19 on our business, results of operations and financial condition; the impact of acquisitions or debt or equity investments or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of restructuring and integration (including information technology systems integration) plans; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Calavo and its financial performance, whether attributable to Calavo or any of its unconsolidated entities; any statements regarding pending investigations, legal claims or tax disputes; any statements of expectation or belief; any risks associated with doing business internationally (including possible restrictive U.S. and foreign governmental actions, such as restrictions on transfers of funds and COVID-19 and trade protection measures such as import/export/customs duties, tariffs and/or quotas); any risks associated with receivables from and/or equity investments in unconsolidated entities; system security risk and cyber-attacks and any statements of assumptions underlying any of the foregoing.
Risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by the forward-looking statements include, but are not limited to, the following: the impact of the COVID-19 pandemic on our business, results of operations, and financial condition, including, but not limited to, disruptions in the manufacturing of our products and the operations of the related supply chains supporting our ability to deliver our products to consumers, impacts on our employees and uncertainty regarding our ability to implement health and safety measures for our employees, uncertainties regarding consumer demand for our products, impact on our food service customers, increased costs, the impact of governmental trade restrictions imposed as a result of COVID-19 and the possible adverse impact of COVID-19 on our goodwill and other intangible assets; our ability to raise prices, particularly in our RFG and Foods segments, to offset increased costs of goods sold, and the impact of such price increases on future net sales; seasonality of our business; sensitivity of our business to changes in market prices of avocados and other agricultural products and other raw materials including fuel, packaging and paper; potential disruptions to our supply chain; risks associated with potential future acquisitions, including integration; potential exposure to data breaches and other cyber-attacks on our systems or those of our suppliers or customers; dependence on large customers; dependence on key personnel and the ability of our management team to work together successfully; potential for labor disputes; reliance on co-packers for a portion of our production needs; competitive pressures, including from foreign growers; risks of recalls and food-related injuries to our customers; changing consumer preferences; the impact of environmental regulations, including those related to climate change; our ability to develop and transition new products and services and enhance existing products and services to meet customer needs; risks associated with doing business internationally (including possible restrictive U.S. and foreign governmental actions, such as restrictions on transfers of funds and COVID-19 and trade protection measures such as import/export/customs duties, tariffs and/or quotas and currency fluctuations); risks associated with receivables from, loans to and/or equity investments in unconsolidated entities, volatility in the value of our common stock; the impact of macroeconomic trends and events; and the resolution of pending investigations, legal claims and tax disputes, including an assessment imposed by the Servicio de Administracion Tributaria in Mexico (the “SAT”) and our defenses against collection activities commenced by the SAT.
For a further discussion of these risks and uncertainties and other risks and uncertainties that we face, please see the risk factors described in our most recent Annual Report on Form 10-K for the fiscal year ended October 31, 2021 filed with the Securities and Exchange Commission and any subsequent updates that may be contained in our Quarterly Reports on Form 10-Q (including this Quarterly Report on Form 10-Q) and other filings with the Securities and Exchange Commission. Forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
2
CALAVO GROWERS, INC.
INDEX
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED, in thousands)
January 31, | October 31, | ||||||
2022 | 2021 | ||||||
Assets |
|
|
|
| |||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Restricted cash | | | |||||
Accounts receivable, net of allowances of $ |
| |
| | |||
Inventories |
| |
| | |||
Prepaid expenses and other current assets |
| |
| | |||
Advances to suppliers |
| |
| | |||
Income taxes receivable |
| |
| | |||
Total current assets |
| |
| | |||
Property, plant, and equipment, net |
| |
| | |||
Operating lease right-of-use assets |
| |
| | |||
Investment in Limoneira Company |
| |
| | |||
Investments in unconsolidated entities |
| |
| | |||
Deferred income taxes |
| |
| | |||
Goodwill |
| |
| | |||
Intangibles, net | | | |||||
Other assets |
| |
| | |||
$ | | $ | | ||||
Liabilities and shareholders' equity | |||||||
Current liabilities: | |||||||
Payable to growers | $ | | $ | | |||
Trade accounts payable |
| |
| | |||
Accrued expenses |
| |
| | |||
Dividend payable |
| — |
| | |||
Other current liabilities | | | |||||
Current portion of operating leases |
| |
| | |||
Current portion of long-term obligations and finance leases |
| |
| | |||
Total current liabilities |
| |
| | |||
Long-term liabilities: | |||||||
Borrowings pursuant to credit facilities, long-term | | | |||||
Long-term operating leases, less current portion |
| |
| | |||
Long-term obligations and finance leases, less current portion |
| |
| | |||
Other long-term liabilities |
| |
| | |||
Total long-term liabilities |
| |
| | |||
Commitments and contingencies | |||||||
Shareholders' equity: | |||||||
Common stock ($ |
| |
| | |||
Additional paid-in capital |
| |
| | |||
Noncontrolling interest |
| |
| | |||
Retained earnings |
| |
| | |||
Total shareholders' equity |
| |
| | |||
$ | | $ | | ||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
Three months ended | ||||||||
January 31, | ||||||||
2022 | 2021 | |||||||
Net sales |
| $ | |
| $ | |
| |
Cost of sales |
| |
| | ||||
Gross profit |
| |
| | ||||
Selling, general and administrative |
| |
| | ||||
Expenses related to Mexican tax matters | | — | ||||||
Impairment and charges related to RFG Florida facility closure | | — | ||||||
Gain on sale of Temecula packinghouse |
| ( |
| ( | ||||
Operating income (loss) |
| ( | | |||||
Interest expense |
| ( |
| ( | ||||
Other income, net |
| |
| | ||||
Unrealized net gain (loss) on Limoneira shares |
| ( |
| | ||||
Income (loss) before income taxes and loss from unconsolidated entities |
| ( |
| | ||||
Income tax (provision) benefit |
| |
| ( | ||||
Net loss from unconsolidated entities |
| ( |
| ( | ||||
Net income (loss) |
| ( |
| | ||||
Add: Net loss attributable to noncontrolling interest |
| |
| | ||||
Net income (loss) attributable to Calavo Growers, Inc. | $ | ( | $ | | ||||
Calavo Growers, Inc.’s net income (loss) per share: | ||||||||
Basic | $ | ( | $ | | ||||
Diluted | $ | ( | $ | | ||||
Number of shares used in per share computation: | ||||||||
Basic |
| |
| | ||||
Diluted |
| |
| | ||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three months ended January 31, | |||||||
2022 | 2021 | ||||||
Cash Flows from Operating Activities: |
|
|
|
| |||
Net income (loss) | $ | ( | $ | | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation and amortization |
| |
| | |||
Non-cash operating lease expense | | | |||||
Net loss from unconsolidated entities |
| |
| | |||
Unrealized net loss (gain) on Limoneira shares |
| |
| ( | |||
Impairment and non-cash charges related to closure of RFG Florida facility | | — | |||||
Stock-based compensation expense |
| |
| | |||
Gain on sale of Temecula packinghouse |
| ( |
| ( | |||
Effect on cash of changes in operating assets and liabilities: | |||||||
Accounts receivable, net |
| ( |
| ( | |||
Inventories, net |
| ( |
| | |||
Prepaid expenses and other current assets |
| ( |
| ( | |||
Advances to suppliers |
| ( |
| | |||
Income taxes receivable/payable |
| |
| | |||
Other assets |
| ( |
| ( | |||
Payable to growers |
| |
| | |||
Trade accounts payable, accrued expenses and other liabilities |
| |
| | |||
Net cash provided by operating activities |
| |
| | |||
Cash Flows from Investing Activities: | |||||||
Purchases of property, plant, and equipment |
| ( |
| ( | |||
Net cash used in investing activities |
| ( |
| ( | |||
Cash Flows from Financing Activities: | |||||||
Payment of dividend to shareholders |
| ( |
| ( | |||
Proceeds from revolving credit facility |
| |
| | |||
Payments on revolving credit facility |
| ( |
| ( | |||
Payments of minimum withholding taxes on net share settlement of equity awards | ( | ( | |||||
Payments on long-term obligations and finance leases |
| ( |
| ( | |||
Proceeds from stock option exercises |
| |
| | |||
Net cash provided by (used in) financing activities |
| |
| ( | |||
Net decrease in cash, cash equivalents and restricted cash |
| |
| | |||
Cash, cash equivalents and restricted cash, beginning of period |
| |
| | |||
Cash, cash equivalents and restricted cash, end of period | $ | | $ | | |||
Noncash Investing and Financing Activities: | |||||||
Right of use assets obtained in exchange for new financing lease obligations | $ | — | $ | | |||
Property, plant, and equipment included in trade accounts payable and accrued expenses | $ | | $ | | |||
The accompanying notes are an integral part of these consolidated condensed financial statements.
6
CALAVO GROWERS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
|
|
|
|
|
| ||||||||||||
Additional | |||||||||||||||||
Common Stock | Paid-in | Retained | Noncontrolling | ||||||||||||||
Shares | Amount | Capital | Earnings | Interest | Total | ||||||||||||
Balance, October 31, 2020 | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
Exercise of stock options and income tax benefit | |
| — |
| |
| — |
| — |
| | ||||||
Payment of min. withholding of taxes on net share settlement of equity awards | — | — | ( | — | — | ( | |||||||||||
Stock compensation expense | — |
| — |
| |
| — |
| — |
| | ||||||
Restricted stock issued | |
| — |
| — |
| — |
| — |
| — | ||||||
Avocados de Jalisco noncontrolling interest contribution | — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Net income attributable to Calavo Growers, Inc. | — |
| — |
| — |
| |
| — |
| | ||||||
Balance, January 31, 2021 | |
| |
| |
| |
| |
| | ||||||
|
|
|
|
|
| ||||||||||||
Additional |
| ||||||||||||||||
Common Stock | Paid-in | Retained | Noncontrolling |
| |||||||||||||
Shares | Amount | Capital | Earnings | Interest | Total | ||||||||||||
Balance, October 31, 2021 | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
Exercise of stock options and income tax benefit | |
| — |
| |
| — |
| — |
| | ||||||
Payment of min. withholding of taxes on net share settlement of equity awards | — | — | ( | — | — | ( | |||||||||||
Stock compensation expense | — |
| — |
| |
| — |
| — |
| | ||||||
Restricted stock issued | |
| — |
| — |
| — |
| — |
| — | ||||||
Avocados de Jalisco noncontrolling interest contribution | — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Net loss attributable to Calavo Growers, Inc. | — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Balance, January 31, 2022 | |
| |
| |
| |
| |
| | ||||||
See accompanying notes to consolidated condensed financial statements.
7
CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of the business
Business
Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a global leader in the avocado industry and a provider of value-added fresh food. Our expertise in marketing and distributing avocados, prepared avocados, and other perishable foods allows us to deliver a wide array of fresh and prepared food products to retail grocery, foodservice, club stores, mass merchandisers, food distributors and wholesalers on a worldwide basis. We procure avocados from California, Mexico and other growing regions around the world. Through our various operating facilities, we (i) sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas, (ii) create, process and package a portfolio of healthy fresh foods including fresh-cut fruit and vegetables, and prepared foods and (iii) process and package guacamole and salsa. We distribute our products both domestically and internationally and report our operations in
The accompanying unaudited consolidated condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends and simplifies the accounting for income taxes by removing certain exceptions and providing new guidance to reduce complexity in certain aspects of the current guidance. This guidance was adopted by the Company during the first quarter of 2022 and did not impact the Company’s financial statements or related disclosures.
2. Information regarding our operations in different segments
We report our operations in
8
items, are evaluated by our Chief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them, to our operating segments.
Three months ended January 31, 2022 | Three months ended January 31, 2021 | ||||||||||||||||||||||||
| Fresh |
|
| Calavo |
|
| Fresh |
|
| Calavo |
| ||||||||||||||
products | RFG | Foods | Total | products | RFG | Foods | Total | ||||||||||||||||||
Avocados | $ | | $ | — | $ | — | $ | | $ | | $ | — | $ | — | $ | | |||||||||
Tomatoes |
| |
| — |
| — |
| |
| |
| — |
| — |
| | |||||||||
Papayas |
| |
| — |
| — |
| |
| |
| — |
| — |
| | |||||||||
Other fresh income |
| |
| — |
| — |
| |
| |
| — |
| — |
| | |||||||||
Fresh-cut fruit | — | | — | | — | | — | | |||||||||||||||||
Fresh-cut vegetables | — | | — | | — | | — | | |||||||||||||||||
Prepared products |
| — |
| |
| |
| |
| — |
| |
| |
| | |||||||||
Salsa |
| — |
| — |
| |
| |
| — |
| — |
| |
| | |||||||||
Total gross sales |
| |
| |
| |
| |
| |
| |
| |
| | |||||||||
Less sales allowances |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | |||||||||
Less inter-company eliminations | ( | — | ( | ( | ( | — | ( | ( | |||||||||||||||||
Net sales | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
| Fresh |
|
| Calavo |
| Interco. |
| |||||||||
products | RFG | Foods | Elimins. | Total | ||||||||||||
(All amounts are presented in thousands) | ||||||||||||||||
Three months ended January 31, 2022 | ||||||||||||||||
Net sales | $ | | $ | | $ | | $ | ( | $ | | ||||||
Cost of sales | | | | ( | | |||||||||||
Gross profit (loss) | $ | | $ | ( | $ | | $ | — | $ | | ||||||
Three months ended January 31, 2021 | ||||||||||||||||
Net sales | $ | | $ | | $ | | $ | ( | $ | | ||||||
Cost of sales | | | | ( | | |||||||||||
Gross profit (loss) | $ | | $ | ( | $ | | $ | — | $ | | ||||||
For the three months ended January 31, 2022 and 2021, intercompany sales and cost of sales of $
Sales to customers outside the U.S. were approximately $
Our foreign operations in Mexico are subject to exchange rate fluctuations and foreign currency transaction costs. The functional currency of our foreign subsidiaries in Mexico is the United States dollar (U.S. dollar). As a result, monetary assets and liabilities are translated into U.S. dollars at exchange rates as of the balance sheet date and non-monetary assets, liabilities and equity are translated at historical rates. Sales and expenses are translated using a weighted-average exchange rate for the period. Gains and losses resulting from those remeasurements and foreign currency transactions are recognized within cost of sales. We recognized foreign currency remeasurement losses in the current quarter. These losses were due primarily to certain long-term net peso receivables. Foreign currency remeasurement losses, net of gains, for the three months ended January 31, 2022 was $
9
Long-lived assets attributed to geographic areas as of January 31, 2022 and October 31, 2021, are as follows (in thousands):
| United States |
| Mexico |
| Consolidated | ||||
January 31, 2022 | $ | | $ | | $ | | |||
October 31, 2021 | $ | | $ | | $ | | |||
3. | Inventories |
Inventories consist of the following (in thousands):
January 31, | October 31, | ||||||
2022 | 2021 | ||||||
Fresh fruit |
| $ | |
| $ | | |
Packing supplies and ingredients |
| |
| | |||
Finished prepared foods |
| |
| | |||
$ | | $ | | ||||
Inventories are stated at the lower of cost or net realizable value. We periodically review the value of items in inventory and record any necessary write downs of inventory based on our assessment of market conditions. Inventory includes reserves of $
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, 2022, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $
During the three months ended January 31, 2022 and 2021, we received $
Calavo and Agricola Belher (“Belher”) have an equal -half ownership interest in Agricola Don Memo, S.A. de C.V. (“Don Memo”). Pursuant to a management service agreement, Belher, through its officers and employees, has day-to-day power and authority to manage the operations.
As of January 31, 2022, and October 31, 2021, we had an investment of $
10
accrues interest at
We make advances to Belher for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under our marketing program to Belher, net of our commission and aforementioned advances. We had grower advances due from Belher totaling $
In August 2015, we entered into a Shareholder’s Agreement with various Mexican partners and created Avocados de Jalisco, S.A.P.I. de C.V. (“Avocados de Jalisco”). Avocados de Jalisco is a Mexican corporation created to engage in procuring, packing and selling avocados. As of January 31, 2022, this entity was approximately
5. | Other assets and Intangibles |
Other assets consist of the following (in thousands):
| January 31, |
| October 31, | ||||
2022 | 2021 | ||||||
Mexican IVA (i.e. value-added) taxes receivable (see note 11) | $ | | $ | | |||
Infrastructure advances to Agricola Belher |
| |
| | |||
Bridge loan to Agricola Belher |
| |
| — | |||
Other |
| |
| | |||
$ | | $ | | ||||
Intangible assets consist of the following (in thousands):
January 31, 2022 | October 31, 2021 | ||||||||||||||||||||
| Weighted- |
| Gross |
| Net |
| Gross |
|
| Net | |||||||||||
Average | Carrying | Accum. | Book | Carrying | Accum. | Book | |||||||||||||||
Useful Life | Value | Amortization | Value | Value | Amortization | Value | |||||||||||||||
Customer list/relationships |
| $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||||
Trade names |
|
| |
| ( |
| |
| |
| ( |
| | ||||||||
Trade secrets/recipes |
|
| |
| ( |
| |
| |
| ( |
| | ||||||||
Brand name intangibles |
| indefinite |
| |
| — |
| |
| |
| — |
| | |||||||
Intangibles, net | $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||||||
We anticipate recording amortization expense of $
11
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. Shares were issuable under the 2011 Plan through December 2020. On April 21, 2021, the shareholders of Calavo approved the Calavo Growers, Inc. 2020 Equity Incentive Plan (the “2020 Plan”). This is a
On December 13, 2021, certain of our officers were granted a total of
On January 3, 2022, all 10 of our current directors were granted
On January 20, 2022, one of our current directors was granted
On February 1, 2022, Brian Kocher, our new Chief Executive Officer, was granted
A combined summary of restricted stock activity, related to our 2011 and 2020 Plans, is as follows (in thousands, except for per share amounts):
|
|
| Weighted-Average |
| Aggregate |
| |||
| Number of Shares |
| Grant Price |
| Intrinsic Value |
| |||
Outstanding at October 31, 2021 |
| | $ | | |||||
Vested |
| ( | $ | | |||||
Granted |
| | $ | | |||||
Outstanding at January 31, 2022 |
| | $ | | $ | | |||
The total recognized stock-based compensation expense for restricted stock was $
Stock options are granted with exercise prices of not less than the fair market value at grant date, generally vest over to
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.
12
A summary of stock option activity, related to our 2011 and 2020 Plans, is as follows (in thousands, except for per share amounts):
|
| Weighted-Average |
| Aggregate | |||||
Exercise | Intrinsic | ||||||||
Number of Shares | Price | Value | |||||||
Outstanding at October 31, 2021 |
| | $ | | |||||
Exercised |
| ( | $ | | |||||
Outstanding at January 31, 2022 |
| | $ | | $ | | |||
Exercisable at January 31, 2022 |
| | $ | | $ | | |||
At January 31, 2022, outstanding and exercisable stock options had a weighted-average remaining contractual term of
7. | Other events |
Dividend payment
On December 3, 2021, we paid a $
Litigation
From time to time, we are involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.
Mexico tax audits
We conduct business both domestically and internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in the normal course of business, we are subject to examination by taxing authorities, primarily in Mexico and the United States.
2011 Assessment
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. As a result, in April 2019, the MFM issued a final tax assessment to CDM (the “2011 Assessment”) totaling approximately $
On June 16, 2021, Calavo reached a settlement agreement with the MFM regarding the 2011 Assessment. Under the terms of the settlement, Calavo agreed to pay approximately $
2013 Assessment
In January 2017, we received preliminary observations from the Servicio de Administracion Tributaria in Mexico (the “SAT”) related to an audit for fiscal year 2013 outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and IVA. We provided a written rebuttal to
13
these preliminary observations during our second fiscal quarter of 2017. During the period from our third fiscal quarter of 2017 through our third fiscal quarter of 2018, we attempted to resolve our case with the SAT through the conclusive agreement submitted before PRODECON, having several working meetings attended by representatives of the SAT, CDM and the PRODECON. However, we were unable to materially resolve our case with the SAT through the PRODECON process.
As a result, in July 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $
We have consulted with both an internationally recognized tax advisor as well as a global law firm with offices throughout Mexico, and we continue to believe that this tax assessment is without merit. In August 2018, we filed an Administrative Appeal on the 2013 Assessment, appealing our case to the SAT’s central legal department in Michoacan. Furthermore, in August 2018, we received a favorable ruling from the SAT’s central legal department in Michoacan on another tax matter (see Note 11 regarding IVA refunds) indicating that they believe that our legal interpretation is accurate on a matter that is also central to the 2013 Assessment. We believe this recent ruling significantly undermines the 2013 Assessment.
On June 25, 2021, we became aware that the Administrative Appeal had been resolved by the SAT against CDM on March 12, 2021, and that we had allegedly failed to timely respond to and challenge the SAT’s notification of such resolution, therefore rendering the 2013 Assessment as definitive. Based on legal counsel from our tax advisory firm, we and our tax advisory firm have concluded that the March notification was not legally communicated. In addition, the SAT has placed liens on the fixed assets of CDM, with a net book value of approximately $
We strongly disagree with above actions taken and conclusions reached by the SAT. We have taken several measures in vigorous defense of our position, as explained below.
On August 27, 2021, we filed a formal complaint, or queja, (the Complaint) before the PRODECON to request its assistance with having the SAT act upon the Reconsideration. This complaint was withdrawn in September, but may still be reinstated if deemed appropriate in the future. It should be noted that although the SAT is not obligated to act upon the Reconsideration, however, we believe that having the option of re-filing the PRODECON Complaint makes it likely that the SAT will respond to the Administrative Reconsideration and be open to settlement discussions.
On August 18, 2021, we filed an Administrative Reconsideration (the Reconsideration) before the Central Legal Department of the SAT located in Mexico City, asserting that the resolution in March of the Administrative Appeal was wrongly concluded, in particular with respect to the following matters:
| o | Failure to recognize CDM as a “maquiladora” |
| o | Considering the Company to have a permanent establishment in Mexico, |
| o | Including fruit purchase deposits transferred by the Company to CDM as taxable, |
| o | Application of 16% IVA tax to fruit purchase deposits |
| o | Imposing double-taxation on the fruit purchase transactions |
On September 22, 2021, we had an initial in-person meeting with the SAT in Mexico City to formally present and discuss the Reconsideration. The SAT agreed to review our Reconsideration in more detail; however, on January 3, 2022, the SAT formally rejected our request for the Reconsideration. In response to this rejection, on January 21, 2022, we filed an Injunction Suit (Juicio de Amparo) with a federal district court seeking to nullify the arguments against the Reconsideration made by the SAT on constitutional grounds. On February 25, 2022, we filed a supplemental Injunction Suit in which we seek to have the liens against the bank accounts of CDM lifted. The injunction suits have been accepted
14
by the court and we are expecting a response by September 2022. The main purpose of the Amparo was to challenge the response issued to the Reconsideration, and with that, to keep the Reconsideration alive until the Amparo is decided. This would allow time to continue the discussions with SAT at the administrative level and would give SAT the legal basis to issue a new resolution in terms of what may be agreed in the ongoing discussions with SAT. This Amparo represents a further opportunity as well for a Court of Law to analyze this matter from a constitutional perspective.
On February 4, 2022, we had a follow-up meeting with the SAT in Mexico City to begin a dialog with the objective of reaching a settlement of the 2013 Assessment. The SAT agreed in principle to continue this dialog, but requested that we provide a financial guaranty to secure the related tax as a pre-requisite to these discussions. On March 10, 2022, we met with the SAT and offered an Administrative Guaranty (Embargo en Via Administrativa) to secure the 2013 Assessment, which provides the SAT with certain administrative rights to CDM assets in the unlikely event we do not prevail in our actions through the Federal Tax Court (see below) or in the Reconsideration process. Once the Administrative Guaranty is in place, the existing liens over the assets of CDM will be removed and the SAT collection process will be suspended.
On August 20, 2021 we filed an Annulment Suit (the Annulment Suit) with the Federal Tax Court, which among other things, strongly contends that the notifications made by the SAT to CDM and its designated advisors of the resolution of the Administrative Appeal in March 2021 were not legally communicated. In addition, the Annulment Suit asserts the same matters central to the Reconsideration, as described above, as wrongly concluded in the resolution of the Administrative Appeal.
On March 4, 2022, the Annulment Suit was formally accepted by the Federal Tax Court, which simultaneously granted a provisional suspension of the collections proceedings by the SAT. The acceptance by the court of the Annulment Suit renders the 2013 Assessment as non-definitive, until such time as the suit is resolved. The Company has presented the Federal Tax Court with evidence of the above offer of the Administrative Guaranty to the SAT, and in connection therewith, expects that the Federal Tax Court will issue a definitive suspension of collections proceedings.
While we continue to believe that the 2013 Assessment is completely without merit, and that we will prevail on the Annulment Suit in the Tax Court, we also believe it is in the best interest of CDM and the Company to settle the 2013 Assessment as quickly as possible. Furthermore, we believe that the above actions taken by CDM will encourage the SAT agree to reach a settlement. In accordance with our cumulative probability analysis, based on factors such as recent settlements made by the SAT in other cases, the 2011 Assessment settlement reached by CDM with the MFM, and the value of CDM assets, we recorded a provision of $
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).
15
The following table sets forth our financial assets and liabilities as of January 31, 2022 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||
(All amounts are presented in thousands) | |||||||||||||
Assets at Fair Value at January 31, 2022: | |||||||||||||
Investment in Limoneira Company(1) | $ | |
| - |
| - | $ | | |||||
Total assets at fair value | $ | | - | - | $ | | |||||||
Assets at Fair Value at October 31, 2021: | |||||||||||||
Investment in Limoneira Company(1) | $ | |
| - |
| - | $ | | |||||
Total assets at fair value | $ | | - | - | $ | | |||||||
(1) The investment in Limoneira Company consists of marketable securities in the Limoneira Company common stock. We currently own approximately
9. | Noncontrolling interest |
The following table reconciles shareholders’ equity attributable to noncontrolling interest related to Avocados de Jalisco (in thousands).
| Three months ended January 31, |
| |||||
Avocados de Jalisco noncontrolling interest |
| 2022 |
| 2021 | |||
| |||||||
Noncontrolling interest, beginning | $ | | $ | | |||
Net loss attributable to noncontrolling interest of Avocados de Jalisco |
| ( |
| ( | |||
Noncontrolling interest, ending | $ | | $ | | |||
10. | Earnings per share |
Basic and diluted net income per share is calculated as follows (data in thousands, except per share data):
Three months ended January 31, |
| |||||||||
| 2022 |
| 2021 |
| ||||||
Numerator: | ||||||||||
Net income (loss) attributable to Calavo Growers, Inc. | $ | ( | $ | | ||||||
Denominator: | ||||||||||
Weighted average shares – Basic |
| |
| | ||||||
Effect of dilutive securities – Restricted stock/options (1) |
| — |
| | ||||||
Weighted average shares – Diluted |
| |
| | ||||||
Net income (loss) per share attributable to Calavo Growers, Inc: | ||||||||||
Basic | $ | ( | $ | | ||||||
Diluted | $ | ( | $ | | ||||||
| (1) | At January 31, 2022, approximately |
16
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 recoverable from the Mexican government.
As of January 31, 2022, and October 31, 2021, CDM IVA receivables totaled $
During the first quarter of fiscal 2017, the tax authorities informed us that their internal opinion, based on the information provided by the local SAT office, considers that CDM is not properly documented relative to its declared tax structure and therefore CDM cannot claim the refundable IVA balance. CDM has strong arguments and supporting documentation to sustain its declared tax structure for IVA and income tax purposes. CDM started an Administrative Appeal for the IVA related to the request of the months of July, August and September of 2015 (the “2015 Appeal”) in order to assert its argument that CDM is properly documented and to therefore change the SAT’s internal assessment. In August 2018, we received a favorable ruling from the SAT’s Legal Administration in Michoacan on the 2015 Appeal indicating that they believe CDM’s legal interpretation of its declared tax structure is indeed accurate. While favorable on this central matter of CDM’s declared tax structure, the ruling, however, still does not recognize the taxpayers right to a full refund for the IVA related to the months of July, August and September 2015. Therefore, in October 2018, CDM filed a substance-over-form Annulment Suit in the Federal Tax Court to recover its full refund for IVA over the subject period, which is currently pending resolution.
In spite of the favorable ruling from the SAT’s Legal Administration in Michoacan, as discussed above, the local SAT office continues to believe that CDM is not properly documented relative to its declared tax structure. As a result, they believe CDM cannot claim certain refundable IVA balances, specifically regarding our IVA refunds related to 2013, 2014, 2015, and 2016, and January and February of 2017. CDM has strong arguments and supporting documentation to sustain its declared tax structure for IVA and income tax purposes. With assistance from our internationally recognized tax advisory firm, as of January 31, 2022, CDM has filed Administrative Appeals for months for which IVA refunds have been denied by the SAT, and will continue filing such appeals for any months for which refunds are denied in the future. A response to these Administrative Appeals is currently pending resolution.
In light of the foregoing, the Company is currently considering its options for resolution of the VAT receivables. In the unlikely event of an unfavorable resolution of the Administrative Appeals, we plan to file Annulment Suits with the Mexican Federal Tax Court. If these suits result in an unfavorable ruling, there is an option to appeal to the Collegiate Circuit Court. The estimated time for the resolution of these suits could be
We believe that our operations in Mexico are properly documented, and our internationally recognized tax advisors believe that there are legal grounds to prevail in collecting the corresponding IVA amounts. Therefore, we believe that it is probable that the Mexican tax authorities will ultimately authorize the refund of the corresponding IVA amounts.
12. Credit Facility
On December 1, 2021, we entered into the Fourth and Fifth Amendments to the Credit Agreement with Bank of America, N.A., as administrative agent (“Bank of America”), and Farm Credit West, PCA (together with Bank of America, the “Lenders”), relating to our Credit Agreement dated as of June 14, 2016, The Fourth and Fifth Amendments, among other terms, included Calavo de Mexico (CDM) as a guarantor, increased the interest rate by
17
| ● | The Fixed Charge Coverage Ratio (FCCR) covenant will be waived for the quarters ended October 31, 2021, January 31, 2022 and April 30, 2022. The covenant will resume for the quarter ended July 31, 2022. |
| ● | The quarterly FCCR covenant will be replaced by a cumulative monthly minimum Consolidated EBITDA covenant, with the first measurement to occur as of January 31, 2022 for the three months then ended, and continuing monthly thereafter through June 2022. |
| ● | Consolidated financial statements must be submitted monthly for the month and year-to-date period, beginning with the financial statements for the month of November 2021 and continuing through June 2022. |
The Company also pledged the
The above terms and conditions will remain in effect until such time as the Company has certified compliance with a
As of January 31, 2022, the Company was not in compliance with the cumulative monthly minimum Consolidated EBITDA covenant, and the Consolidated Leverage Ratio (CLR) covenant. In March 2022, the Company and the Lenders entered into the Sixth Amendment, Limited Waiver, and Limited Consent to Credit Agreement (the “sixth Amendment”). The Sixth Amendment, among other terms, waived the non-compliance of the financial covenants as of January 31, 2022 and amended the financial covenant requirements as follows:
| ● | The cumulative monthly minimum Consolidated EBITDA testing has been waived and the CLR covenant testing is waived through July 31, 2022. |
| ● | Minimum Consolidated EBITDA of $ |
| ● | Monthly cumulative FCCR of |
The interest rate of the facility increased to BSBY plus
We expect to remain in compliance with the Credit Agreement, as so amended, through March 2023.
13. COVID-19 Pandemic Impact
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The COVID-19 pandemic has created challenging and unprecedented conditions for our business, and we are committed to taking action in support of a Company-wide response to the crisis. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. This has resulted in inflationary and cost pressures that have significantly increased, and continue to adversely impact, our production and distribution costs, including costs of raw materials, packaging, labor, and freight. We are also experiencing pressure in our supply chain due to strained transportation capacity and lack of sufficient labor availability. We believe, however, that we are well-positioned for the future as we continue to navigate the crisis and have successfully implemented contingency plans in the U.S. and in Mexico to monitor the evolving needs of our businesses, as well as those related to our Peru partner in consignment avocado sales.
18
The effects of the pandemic have been more pronounced in the portions of our business servicing foodservice customers and to a lesser extent certain segments of our retail business, including behind-the-glass deli and grab-and-go convenience items.
In early 2021, health agencies approved vaccines for combating the COVID-19 virus. In November 2021, the omicron variant of the SARS-COV-2 virus has started to spread throughout the world, which led to further pandemic restrictions. While many of such restrictions have since been lifted, the pace of the recovery from the COVID-19 pandemic is not presently known. We cannot reasonably estimate the duration or extent of the pandemic’s adverse impact on our business, operating results, and long-term liquidity position.
14. Closure of RFG Florida facility
On November 15, 2021, the Green Cove facility of RFG has ceased operations. The Company’s Fresh avocado operations at this facility will continue in operation and are not affected. RFG will continue to serve customers of this location from its other food processing locations, primarily in Georgia.
The closure resulted in a reduction of
As of January 31, 2022 and October 31, 2021, the Company had right of use assets with a net book value of $
During the first quarter of fiscal 2022, we incurred $
19
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the fiscal year ended October 31, 2021 of Calavo Growers, Inc. (“we”, “Calavo”, or the “Company”).
Recent Developments
Mexican Avocado Imports
On February 11, 2022, the United States Department of Agriculture halted all imports of avocados coming into the United States from Mexico. This ban was lifted on February 18, 2022. This stoppage of imports did not significantly impact our operations or our customers and we do not expect this to have a negative impact on our financial results.
COVID-19 Pandemic Impact
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The COVID-19 pandemic has created challenging and unprecedented conditions for our business, and we are committed to taking action in support of a Company-wide response to the crisis. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. This has resulted in inflationary and cost pressures that have significantly increased, and continue to adversely impact, our production and distribution costs, including costs of raw materials, packaging, labor, and freight. We are also experiencing pressure in our supply chain due to strained transportation capacity and lack of sufficient labor availability. We believe that we are well-positioned for the future as we continue to navigate the crisis and have successfully implemented contingency plans in the U.S. and in Mexico to monitor the evolving needs of our businesses in those countries, as well as those related to our Peru partner in consignment avocado sales.
The effects of the pandemic have been more pronounced in the portions of our business servicing foodservice customers and to a lesser extent certain segments of our retail business, including behind-the-glass deli and grab-and-go convenience items.
In early 2021, health agencies approved vaccines for combating the COVID-19 virus. In November 2021, the omicron variant of the SARS-COV-2 virus has started to spread throughout the world, which led to further pandemic restrictions. While many of such restrictions have since been lifted, the pace of the recovery from the COVID-19 pandemic is not presently known. We cannot reasonably estimate the duration or extent of the pandemic’s adverse impact on our business, operating results, and long-term liquidity position.
COVID-19 Recovery Economic Impact
The recovery from the COVID-19 pandemic and the current economic climate is increasing labor costs, commodity costs and logistical costs. We are experiencing operational challenges that impact our production facilities and our logistics network; the impact of prices for petroleum-based products, packaging materials and commodity costs; and the availability of sufficient labor is increasing costs companywide.
20
In response to the inflationary costs described above, we notified our customers of our plans to institute price increases for our RFG and Foods products. Management believes the price increases will largely be accepted by our customers without significant loss of sales, will reverse the margin compression experienced by RFG and Foods segments during the pandemic, and will enable us to continue to invest in initiatives that drive growth.
Dividend payment
On December 3, 2021, we paid a $1.15 per share dividend in the aggregate amount of $20.3 million to shareholders of record on November 12, 2021.
Litigation
From time to time, we are involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.
Project Uno
During the third quarter of 2021, the Company launched Project Uno, a strategic set of initiatives that seeks to identify areas of operating efficiencies and cost savings to expand profit margins, cash flow and return on invested capital. We have undertaken multiple productivity and transformation initiatives, including (1) closure of the RFG Florida plant and transfer of its viable operations into RFG Georgia, (2) implementing broader supply chain operational improvements, (3) integrating our commercial, logistics, IT, procurement and accounting functions across the three divisions, (4) product rationalization initiatives which are aimed at eliminating unprofitable or slow moving SKUs and (5) outsourcing certain functions in our North American business to third-party service providers and the associated implementation of new procurement technology solutions. The Company will continue to carry out the existing productivity initiatives as well as additional initiatives under this strategy in fiscal 2022.
Mexico tax audits
We conduct business both domestically and internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in the normal course of business, we are subject to examination by taxing authorities, primarily in Mexico and the United States.
2011 Assessment
During our third quarter of fiscal 2016, our wholly-owned subsidiary, Calavo de Mexico (CDM) 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. As a result, in April 2019, the MFM issued a final tax assessment to CDM (the “2011 Assessment”) totaling approximately $2.2 billion Mexican pesos related to Income Tax, Flat Rate Business Tax, and value added tax, corresponding to the fiscal year 2011 tax audit.
On June 16, 2021, Calavo reached a settlement agreement with the MFM regarding the 2011 Assessment. Under the terms of the settlement, Calavo agreed to pay approximately $47.8 million Mexican pesos (approximately $2.4 million USD) as a full and final settlement of all taxes, fines and penalties asserted by the MFM. The settlement included $1.5 million USD of income taxes and $0.9 million USD of value added taxes, with both amounts including penalties and interest and inflationary adjustments, which have been recorded in the financial statements as a discrete item in Income Tax Provision and in Expenses related to Mexican tax matters, respectively.
2013 Assessment
In January 2017, we received preliminary observations from the Servicio de Administracion Tributaria in Mexico (the “SAT”) related to an audit for fiscal year 2013 outlining certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and IVA. We provided a written rebuttal to these preliminary observations during our second fiscal quarter of 2017. During the period from our third fiscal quarter
21
of 2017 through our third fiscal quarter of 2018, we attempted to resolve our case with the SAT through the conclusive agreement submitted before PRODECON, having several working meetings attended by representatives of the SAT, CDM and the PRODECON. However, we were unable to materially resolve our case with the SAT through the PRODECON process.
As a result, in July 2018, the SAT’s local office in Uruapan issued to CDM a final tax assessment (the “2013 Assessment”) totaling approximately $2.6 billion Mexican pesos (which includes annual adjustments for inflation, and equals approximately $126.6 million USD at January 31, 2022) related to Income Tax, Flat Rate Business Tax, and value added tax, related to this fiscal 2013 tax audit. This amount has been adjusted for inflation as of January 31, 2022 to the amount of $3.08 billion Mexican pesos (approx. $148.6 million USD). Additionally, the tax authorities have determined that we owe our employee’s profit-sharing liability, totaling approximately $118 million Mexican pesos (approx. $5.7 million USD at January 31, 2022).
We have consulted with both an internationally recognized tax advisor as well as a global law firm with offices throughout Mexico, and we continue to believe that this tax assessment is without merit. In August 2018, we filed an Administrative Appeal on the 2013 Assessment, appealing our case to the SAT’s central legal department in Michoacan. Furthermore, in August 2018, we received a favorable ruling from the SAT’s central legal department in Michoacan on another tax matter (see Note 11 regarding IVA refunds) indicating that they believe that our legal interpretation is accurate on a matter that is also central to the 2013 Assessment. We believe this recent ruling significantly undermines the 2013 Assessment.
On June 25, 2021, we became aware that the Administrative Appeal had been resolved by the SAT against CDM on March 12, 2021, and that we had allegedly failed to timely respond to and challenge the SAT’s notification of such resolution, therefore rendering the 2013 Assessment as definitive. Based on legal counsel from our tax advisory firm, we and our tax advisory firm have concluded that the March notification was not legally communicated. In addition, the SAT has placed liens on the fixed assets of CDM, with a net book value of approximately $26 million USD, and on bank accounts of CDM totaling approximately $1 million USD in order to guaranty the 2013 Assessment. For reasons explained below, we do not believe that these liens pose a risk to the ongoing business operations of CDM.
We strongly disagree with above actions taken and conclusions reached by the SAT. We have taken several measures in vigorous defense of our position, as explained below.
On August 27, 2021, we filed a formal complaint, or queja, (the Complaint) before the PRODECON to request their assistance with having the SAT act upon the Reconsideration. This complaint was later withdrawn in September, but may still be reinstated if deemed appropriate in the future. It should be noted that although the SAT is not obligated to act upon the Reconsideration, however, we believe that having the option of re-filing the PRODECON Complaint makes it likely that the SAT will respond to the Administrative Reconsideration and be open to settlement discussions.
On August 18, 2021, we filed an Administrative Reconsideration (the Reconsideration) before the Central Legal Department of the SAT located in Mexico City, asserting that the resolution in March of the Administrative Appeal was wrongly concluded, in particular with respect to the following matters:
| o | Failure to recognize CDM as a “maquiladora” |
| o | Considering the Company to have a permanent establishment in Mexico, |
| o | Including fruit purchase deposits transferred by the Company to CDM as taxable, |
| o | Application of 16% IVA tax to fruit purchase deposits |
| o | Imposing double-taxation on the fruit purchase transactions |
On September 22, 2021, we had an initial in-person meeting with the SAT in Mexico City to formally present and discuss the Reconsideration. The SAT agreed to review our Reconsideration in more detail; however, on January 3, 2022, the SAT formally rejected our request for the Reconsideration. In response to this rejection, on January 21, 2022, we filed an Injunction Suit (Juicio de Amparo) with a federal district court seeking to nullify the arguments against the Reconsideration made by the SAT on constitutional grounds. On February 25, 2022, we filed a supplemental Injunction Suit in which we seek to have the liens against the bank accounts of CDM lifted. The injunction suits have been accepted by the court and we are expecting a response by September 2022. The main purpose of the Amparo was to challenge the
22
response issued to the Reconsideration, and with that, to keep the Reconsideration alive until the Amparo is decided. This would allow time to continue the discussions with SAT at the administrative level and would give SAT the legal basis to issue a new resolution in terms of what may be agreed in the ongoing discussions with SAT. This Amparo represents a further opportunity as well for a Court of Law to analyze this matter from a constitutional perspective.
On February 4, 2022, we had a follow-up meeting with the SAT in Mexico City to begin a dialog with the objective of reaching a settlement of the 2013 Assessment. The SAT agreed in principle to continue this dialog, but requested that we provide a financial guaranty to secure the related tax as a pre-requisite to these discussions. On March 10, 2022, we met with the SAT and offered an Administrative Guaranty (Embargo en Via Administrativa) to secure the 2013 Assessment, which provides the SAT with certain administrative rights to CDM assets in the unlikely event we do not prevail in our actions through the Federal Tax Court (see below) or in the Reconsideration process. Once the Administrative Guaranty is in place, the existing liens over the assets of CDM will be removed and the SAT collection process will be suspended.
On August 20, 2021 we filed an Annulment Suit (the Annulment Suit) with the Federal Tax Court, which among other things, strongly contends that the notifications made by the SAT to CDM and its designated advisors of the resolution of the Administrative Appeal in March 2021 were not legally communicated. In addition, the Annulment Suit asserts the same matters central to the Reconsideration, as described above, as wrongly concluded in the resolution of the Administrative Appeal.
On March 4, 2022, the Annulment Suit was formally accepted by the Federal Tax Court, which simultaneously granted a provisional suspension of the collections proceedings by the SAT. The acceptance by the court of the Annulment Suit renders the 2013 Assessment as non-definitive, until such time as the suit is resolved. The Company has presented the Federal Tax Court with evidence of the above offer of the Administrative Guaranty to the SAT, and in connection therewith, expects that the Federal Tax Court will issue a definitive suspension of collections proceedings.
While we continue to believe that the 2013 Assessment is completely without merit, and that we will prevail on the Annulment Suit in the Tax Court, we also believe it is in the best interest of CDM and the Company to settle the 2013 Assessment as quickly as possible. Furthermore, we believe that the above actions taken by CDM will encourage the SAT agree to reach a settlement. In accordance with our cumulative probability analysis, based on factors such as recent settlements made by the SAT in other cases, the 2011 Assessment settlement reached by CDM with the MFM, and the value of CDM assets, we recorded a provision of $11 million USD, in the third quarter of fiscal 2021, as a discrete item in Income Tax Provision. The provision includes estimated penalties, interest and inflationary adjustments. We believe that this provision remains appropriate as of January 31, 2022 based on or cumulative probability analysis. We incurred $0.4 million of related professional fees for the three months ended January 31, 2022, which have been recorded in Expenses related to Mexican Tax matters.
Closure of RFG Florida facility
On November 15, 2021, the Green Cove facility of RFG has ceased operations. The Company’s Fresh avocado operations at this facility will continue in operation and are not affected. RFG will continue to serve customers of this location from its other food processing locations, primarily in Georgia.
The closure resulted in a reduction of 140 employees, impairment of leasehold improvements, writedowns of inventory and other assets, and certain cash expenditures for the relocation of machinery and equipment and the closure of the leased facilities. During the fourth quarter of fiscal 2021, we wrote down $8.7 million of leasehold improvements, $0.1 million of equipment, and $0.6 million of inventory (recognized through cost of goods sold). We also paid $0.4 million in employee severance. The impairment related to the RFG Florida closure has been recorded on the face of the income statement under “Impairment and charges related to RFG Florida facility closure”.
As of January 31, 2022 and October 31, 2021, the Company had right of use assets with a net book value of $4.4 million and $4.8 million respectively, and lease liabilities of $5.5 million and $6.0 million, respectively, recorded on the balance sheet related to the closed facility. The facility lease has a maturity date of October 31, 2031. The Company intends to seek a sub-lease tenant to assume the vacated space, and believes such a sub-lease can be obtained at a lease
23
rate, and for a lease period, sufficient to realize the right of use asset. Management will continue to evaluate the actual amounts and duration of expected future sub-lease revenues. Should the actual sub-lease revenues be less than those currently expected, the Company may need to record impairment of some or all of its investment in the right of use asset.
During the first quarter of fiscal 2022, we incurred $0.7 million of incremental restructuring and related costs due to the transition to other facilities.
Critical Accounting Estimates
In preparing our financial statements in accordance with GAAP, we are required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, and costs and expenses that are reported in the financial statements and accompanying disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates and assumptions. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
There have been no material changes in our critical accounting estimates during the three months ended January 31, 2022, as compared to those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for our fiscal year ended October 31, 2021.
Non-GAAP Financial Measures
The below tables include non-GAAP measures EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted EPS, which are not prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.”
EBITDA is defined as net income (loss) attributable to Calavo Growers, Inc. excluding (1) interest income and expense, (2) income taxes (benefit) provision, (3) depreciation and amortization and (4) stock-based compensation expense. Adjusted EBITDA is EBITDA with further adjustments for (1) non-cash net losses recognized from unconsolidated entities, (2) goodwill impairment, (3) write-off of long-lived assets, (4) acquisition-related costs, (5) restructuring-related costs, including certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted EBITDA is a primary metric by which management evaluates the operating performance of the business, on which certain operating expenditures and internal budgets are based and by which, in addition to other factors, the Company’s senior management is compensated. The adjustments to calculate EBITDA and adjusted EBITDA are items recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded.
Adjusted net income is defined as net income (loss) attributable to Calavo Growers, Inc. excluding (1) non-cash net losses recognized from unconsolidated entities, (2) goodwill impairment, (3) write-off of long-lived assets, (4) acquisition-related costs, (5) restructuring-related costs, including certain severance costs, (6) certain litigation and other related costs, and (7) one-time items. Adjusted net income and the related measure of adjusted diluted EPS exclude certain items that are recognized and recorded under GAAP in particular periods but might be viewed as not necessarily coinciding with the underlying business operations for the periods in which they are so recognized and recorded. We believe adjusted net income affords investors a different view of the overall financial performance of the Company than adjusted EBITDA and the GAAP measure of net income (loss) attributable to Calavo Growers, Inc.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the financial tables below.
Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. One-time items are identified in the notes to the reconciliations in the financial tables below.
24
Non-GAAP information should be considered as supplemental in nature and not as a substitute for, or superior to, any measure of performance prepared in accordance with GAAP. None of these metrics are presented as measures of liquidity. The way the Company measures EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted EPS may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in Company agreements.
Adjusted Net Income (Non-GAAP, Unaudited)
The following table presents adjusted net income and adjusted diluted EPS, each a non-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., and Diluted EPS, which are the most directly comparable GAAP measures. See “Non-GAAP Financial Measures” above (in thousands, except per share amounts).
Three months ended January 31, | |||||||
| 2022 |
| 2021 |
| |||
Net income (loss) attributable to Calavo Growers, Inc. | $ | (4,043) | $ | 5,277 | |||
Non-GAAP adjustments: |
|
|
|
| |||
Non-cash losses recognized from unconsolidated entities (a) |
| 535 |
| 155 | |||
Loss (Recovery) from FreshRealm and other related expenses (b) |
| — |
| (39) | |||
Acquisition costs (c) |
| — |
| 262 | |||
Net (gain) loss on Limoneira shares (d) |
| 2,130 |
| (3,589) | |||
RFG rent expense add back (e) |
| 108 |
| 108 | |||
Restructure costs - consulting, management recruiting and severance (f) | 1,118 | — | |||||
Mexican tax matters (g) | 367 | — | |||||
Impairment and charges related to closure of RFG Florida facility (h) | 654 | — | |||||
Tax impact of adjustments (i) |
| (1,238) |
| 840 | |||
Adjusted net income attributed to Calavo Growers, Inc. | $ | (369) | $ | 3,014 | |||
Calavo Growers, Inc.’s net income (loss) per share: |
|
|
|
| |||
Diluted EPS (GAAP) | $ | (0.23) | $ | 0.30 | |||
Adjusted Diluted EPS | $ | (0.02) | $ | 0.17 | |||
Number of shares used in per share computation: |
|
|
|
| |||
Diluted |
| 17,653 |
| 17,669 | |||
| (a) | For the three months ended January 31, 2022 and 2021, we realized losses from Agricola Don Memo totaling $0.5 million and $0.2 million. |
| (b) | As part of the FreshRealm Separation Agreement, we received $0.1 million of previously reserved receivables for the three months ended January 31, 2021. Partially offsetting this benefit, we had professional fees related to the FreshRealm Separation Agreement. |
| (c) | In the first quarter of 2021, we incurred professional service costs related to a considered but non-consummated acquisition. |
| (d) | For the three months ended January 31, 2022 and 2021, we recorded $2.1 million in unrealized losses and $3.6 million in unrealized gains related to these mark-to-market adjustments, respectively. |
| (e) | For the three months ended January 31, 2022 and 2021, we incurred $0.1 million related to rent paid for RFG corporate office space that we have vacated and plan to sublease. |
| (f) | For the three months ended January 31, 2022, we recorded $1.1 million of consulting expenses related to an enterprise-wide strategic business operations study conducted by a third-party management consulting organization for the purpose of restructuring to improve the profitability of the organization and efficiency of our operations. |
| (g) | For the three months ended January 31, 2022, we incurred $0.4 million of related professional fees related to the Mexican tax matters. See Note 7 to the consolidated condensed financial statements included in this Quarterly Report for further information. |
25
| (h) | On October 18, 2021, we announced the closure of RFG’s food processing operations at our Green Cove Springs (near Jacksonville), Florida facility, as part of our Project Uno profit improvement program. As of November 15, the Green Cove facility of RFG has ceased operations. We incurred $0.7 million of expenses in the first quarter of fiscal 2022, related to the closure of this facility. |
| (i) | Tax impact of non-GAAP adjustments are based on effective year-to-date tax rates. |
Reconciliation of EBITDA and Adjusted EBITDA (Non-GAAP, Unaudited)
The following table presents EBITDA and adjusted EBITDA, each a non-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., which is the most directly comparable GAAP measure. See “Non-GAAP Financial Measures” above (in thousands, except per share amounts).
| Three months ended January 31, | |||||
| 2022 |
| 2021 | |||
Net income (loss) attributable to Calavo Growers, Inc. | $ | (4,043) | $ | 5,277 | ||
Interest Income | (133) | (72) | ||||
Interest Expense |
| 327 |
| 174 | ||
Provision (benefit) for Income Taxes |
| (1,160) |
| 1,943 | ||
Depreciation Amortization |
| 4,312 |
| 4,294 | ||
Stock-Based Compensation (d) |
| 556 |
| 907 | ||
EBITDA | $ | (141) | $ | 12,523 | ||
Adjustments: |
|
|
|
| ||
Non-cash losses recognized from unconsolidated entities (a) |
| 535 |
| 155 | ||
Net (gain) loss on Limoneira shares (d) |
| 2,130 |
| (3,589) | ||
Loss (Recovery) from FreshRealm and other related expenses (b) |
| — |
| (39) | ||
RFG rent expense add back (e) |
| 108 |
| 108 | ||
Acquisition costs (c) |
| — |
| 262 | ||
Restructure costs - consulting and management recruiting and severance (f) | 1,118 | — | ||||
Expenses related to Mexican tax matters (g) | 367 | — | ||||
Impairment and charges related to closure of RFG Florida facility (h) | 618 | — | ||||
Adjusted EBITDA | $ | 4,735 | $ | 9,420 | ||
Adjusted EBITDA per dilutive share | $ | 0.27 | $ | 0.53 | ||
See prior page for footnote references
26
Net Sales
The following table summarizes our net sales by business segment for each of the three months ended January 31, 2022 and 2021:
Three months ended January 31, | |||||||||
2022 | Change | 2021 | |||||||
Gross sales: |
|
|
|
|
|
|
| ||
Fresh products | $ | 162,585 | 41 | % | $ | 115,459 | |||
RFG |
| 95,764 | 6 | % |
| 90,306 | |||
Calavo Foods |
| 17,128 | 4 | % |
| 16,458 | |||
Less intercompany eliminations | (1,385) | (16) | % | (1,645) | |||||
Total net sales | $ | 274,092 | 24 | % | $ | 220,578 | |||
As a percentage of sales: | |||||||||
Fresh products |
| 59.0 | % |
| 52.0 | % | |||
RFG |
| 34.8 | % |
| 40.6 | % | |||
Calavo Foods |
| 6.2 | % |
| 7.4 | % | |||
| 100.0 | % |
| 100.0 | % | ||||
Results of Operations
Summary
Net sales for the three months ended January 31, 2022, compared to the corresponding period in fiscal 2021, increased by $53.5 million, or approximately 24%. The increase was due to increases across all segments, but most significantly in Fresh products.
For the three months ended January 31, 2022, the increase in Fresh product sales was primarily due to an increase in sales of avocados. For the three months ended January 31, 2022, the increase in RFG sales was due primarily to increased sales from fresh-cut fruit vegetables and prepared foods products. For the three months ended January 31, 2022, the increase in Calavo Foods was due primarily to an increase in the sales of prepared avocado products. See discussion below for further details.
All three segments of our business are subject to seasonal trends which can impact the volume and/or quality of raw materials sourced in any particular quarter. All intercompany sales are eliminated in our consolidated results of operations.
Fresh products
Three Months Ended January 31, 2022 vs. Three Months Ended January 31, 2021
Net sales for the Fresh products business increased by approximately $47.1 million, or 41%, for the first quarter of fiscal 2022 compared to the corresponding period in fiscal 2021. This increase in Fresh product sales during the first quarter of fiscal 2022 was primarily related to increased sales prices of avocados due to increased demand and lower overall supply of avocados in the marketplace. In addition, tomato sales increased due to an increase in overall sales volume, partially offset by a decrease in sales prices.
Sales of avocados increased $46.3 million, or 45%, for the first quarter of 2022 compared to the prior year period. The average avocado sales price per carton increased 64% compared to the prior year period. This increase in the sales price per carton was mainly due to a decrease of supply of avocados in the marketplace. The volume of avocados sold in the first quarter of 2022 decreased 12% compared to the prior year period.
27
Sales of tomatoes increased $0.8 million, or 9%, for the first quarter of 2022, when compared to the prior year period. This increase in tomato sales was primarily due to a 24% increase in the cartons sold of tomatoes, partially offset by a 12% decline in the sales price per carton.
RFG
Three Months Ended January 31, 2022 vs. Three Months Ended January 31, 2021
Net sales for RFG for the quarter ended January 31, 2022, compared to the corresponding period in fiscal 2021, increased $5.5 million, or 6%. This increase was primarily reflecting a volume increase of 2%, favorable product mix and price increases.
Calavo Foods
Three Months Ended January 31, 2022 vs. Three Months Ended January 31, 2021
Net sales for Calavo Foods for the quarter ended January 31, 2022, compared to the corresponding period in fiscal 2021, increased $0.7 million, or 4%. Sales of prepared avocado products increased by approximately $1.0 million, or 6%, primarily related to an increase in the total volume of pounds sold.
Gross Profit
The following table summarizes our gross profit and gross profit percentages by business segment for the three months ended January 31, 2022 and 2021:
Three months ended January 31, | |||||||||
2022 | Change | 2021 | |||||||
Gross profit (loss): |
|
|
|
|
|
|
| ||
Fresh products | $ | 11,666 | (11) | % | $ | 13,145 | |||
RFG |
| (652) | n/m | % |
| (23) | |||
Calavo Foods |
| 2,214 | (53) | % |
| 4,717 | |||
Total gross profit | $ | 13,228 | (26) | % | $ | 17,839 | |||
Gross profit (loss) percentages: | |||||||||
Fresh products |
| 7.2 | % |
| 11.4 | % | |||
RFG |
| (0.7) | % |
| (0.0) | % | |||
Calavo Foods |
| 12.9 | % |
| 28.7 | % | |||
Consolidated |
| 4.8 | % |
| 8.1 | % | |||
Summary
Our cost of goods sold consists predominantly of ingredient costs (fruit, vegetables and other food products), packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products, and other direct expenses pertaining to products sold.
Gross profit decreased by approximately $4.6 million, or 26%, for the first quarter of fiscal 2022 compared to the corresponding period in fiscal 2021. The decrease was primarily attributable to gross profit declines across all segments.
Fresh products
The decrease in our Fresh products segment gross profit percentage for the quarter ended January 31, 2022, was the result of decreased gross profit for avocados. For the first quarter of fiscal 2022, the gross profit percentage for avocados
28
was 7. 2% compared to 11.4% for the first quarter of 2021. Gross profit change is the result of lower volumes and increases in labor, and freight costs.
Gross profit for the quarter was also affected by the weakening of the U.S. dollar in relation to the Mexican peso during the quarter, resulting in a $0.6 million net loss related the remeasurement of peso-dominated net assets at our Mexican subsidiaries. During the same period last year, we had a remeasurement gain of $1.1 million.
Note that any additional significant fluctuations in the exchange rate between the U.S. dollar and the Mexican peso may have a material impact on future gross profits for our Fresh products segment.
RFG
RFG’s gross profit (loss) percentage for the quarter ended January 31, 2022 was (0.7)%, compared to less than (0.0)% for the prior year period. The declines in gross profit for the quarter ended January 31, 2022, were due to increased commodity costs, lack of availability of key commodities, lower supply and higher turnover of labor. In addition, results were negatively impacted by costs associated with the consolidation of our Jacksonville, Florida facility into our Georgia facility.
We continue to experience operational challenges to our production facilities and logistics networks, shortage of labor and impacts from increases in prices of petroleum-based products, packaging materials and commodities, all of which are increasing costs companywide with the effects especially pronounced at RFG.
In response to the inflationary costs described above, we notified our customers of our plans to institute price increases for our RFG and Foods products. Management believes the price increases will largely be accepted by our customers without significant loss of sales, will reverse the margin compression experienced by RFG and Foods segments during the pandemic, and will enable us to continue to invest in initiatives that drive growth. However, we cannot assure you that such price increases will not cause a loss of sales, will improve margins in our RFG and Foods segments or that we will be able to undertake future initiatives to drive growth.
Management has considered the impact of current operating results as well as expected future results and has concluded that there were no impairment indicators with regard to intangible assets carried on the balance sheet as of January 31, 2022. This is consistent with the Company’s previous assessments which had reflected a significant cushion between the Company’s fair value determinations and the recorded carrying values of the respective intangible assets. Management will continue to evaluate the impact of operating results on these considerations in future quarters.
Calavo Foods
Calavo Foods’ gross profit percentage for the first quarter of fiscal 2022 was 12.9%, compared to 28.7% for the prior year period. The decreases in Calavo Foods gross profit percentage were due primarily to higher fruit costs and manufacturing costs. Any significant fluctuation in the cost of fruit used in the production process or the exchange rate between the U.S. dollar and the Mexican peso may have a material impact on future gross profit for our Calavo Foods segment.
Selling, General and Administrative
Three months ended January 31, | |||||||||
2022 | Change | 2021 | |||||||
(Dollars in thousands) | |||||||||
Selling, general and administrative | $ | 15,337 |
| 8 | % | $ | 14,174 |
| |
Percentage of net sales |
| 5.6 | % |
| 6.4 | % | |||
Selling, general and administrative expenses of $15.3 million for the three months ended January 31, 2022 include costs of marketing and advertising, sales expenses (including broker commissions) and other general and administrative costs. Selling, general and administrative expenses increased by $1.2 million, or 8%, for the three months ended January 31, 2022 compared to the prior year period. This increase was primarily due to an increase in consulting services related
29
to restructuring efforts ($1.1 million), and an increase in salaries and benefits expense related to the investment in key personnel to advance Project Uno ($0.6 million). Partially offsetting this increase was a decrease of stock-based compensation due to less amortization related to Management Incentive stock awards from prior years ($0.4 million), and a decrease in the bonus accrual ($0.4 million).
Loss from unconsolidated entities
Three months ended January 31, | ||||||||
2022 | Change | 2021 | ||||||
(Dollars in thousands) | ||||||||
Loss from unconsolidated entities |
| $ | (535) |
| 245 | % | $ | (155) |
Losses from unconsolidated entities includes our participation in earnings or losses from our investments in Don Memo. For the three months ended January 31, 2022, we realized losses from Agricola Don Memo totaling $0.5 million and $0.2 million.
Income Taxes (Provision) Benefit
Three months ended January 31, | |||||||||||
2022 | Change | 2021 | |||||||||
Income tax benefit (provision) |
| $ | 1,160 |
| NM | % | $ | (1,943) |
|
| |
Effective tax rate |
| 21.8 | % |
| 27.1 | % | |||||
Our tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter.
Liquidity and Capital Resources
Cash provided by operating activities was $2.4 million for the three months ended January 31, 2022, compared to cash provided by operating activities of $13.2 million for the corresponding period in fiscal 2021. Cash used by operating activities for the three months ended January 31, 2022 reflect primarily our net loss of $4.2 million, plus add-backs for non-cash activities (depreciation and amortization, stock-based compensation expense, provision for losses on accounts receivable, losses from unconsolidated entities, net gains or losses on Limoneira shares, deferred taxes, loss on disposal of property, plant and equipment, and gain on the sale of the Temecula packinghouse) of $7.8 million and a net decrease in the components of our working capital of approximately $1.3 million.
Decreases in operating cash flows caused by working capital changes include an increase in inventory of $11.7 million, an increase in accounts receivable of $10.6 million, an increase in advances to suppliers of $3.3 million, an increase in prepaid expenses and other current assets of $1.6 million and an increase in other assets of $0.3 million, partially offset by an increase in payable to growers of $14.8 million, a net increase in accounts payable, accrued expenses and other liabilities of $7.9 million and a decrease in income taxes receivable of $3.5 million.
The increase in our inventory, as of January 31, 2022 when compared to October 31, 2021, is primarily due to higher inventory of California and Mexican Avocados. The increase in our accounts receivable, as of January 31, 2022, when compared to October 31, 2021, is primarily due an increase in sales in January 2022 compared to October 2021. The increase in advances to suppliers is mainly due to advances to our tomato growers in the first three months of fiscal 2022. The increase in payable to growers is mostly due to increased volumes and sales prices for California and Mexican avocados in the month of January 2022 compared to October 2021. The increase in accounts payable, accrued expenses and other liabilities is primarily related to an increase in payables related to an increase in the price of California and Mexican avocados. The decrease in income taxes receivable is due to the receipt of an income tax refund in the first quarter of fiscal 2022.
30
Cash used in investing activities was $2.1 million for the three months ended January 31, 2022, which primarily related to the purchases of property, plant and equipment.
Cash provided by financing activities was $5.6 million for the three months ended January 31, 2022, which related principally to the net proceeds on our credit facilities totaling $26.3 million, partially offset by, the payment of a $20.3 million dividend and payments on long-term obligations of $0.4 million.
Our principal sources of liquidity are our existing cash reserves, cash generated from operations and amounts available for borrowing under our existing credit facilities. Restricted cash, cash and cash equivalents as of January 31, 2022 and October 31, 2021 totaled $8.8 million and $2.9 million. Our working capital at January 31, 2022 was $62.7 million, compared to $38.0 million at October 31, 2021.
We believe that cash flows from operations, the available Credit Facility, and other sources will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements for at least the next twelve months. We will continue to pursue grower recruitment opportunities and expand relationships with retail and/or foodservice customers to fuel growth in each of our business segments. We have a revolving credit facility with Bank of America as administrative agent and Farm Credit West as joint lead arranger. Under the terms of this agreement, we may draw on funds for both working capital and long-term productive asset purchases. Total credit available under this agreement is $80 million and it expires in January 2026. For our Credit Facility, the weighted-average interest rate was 1.9% and 2.2% at January 31, 2022 and October 31, 2021. Under the Credit Facility, we had $64.0 million and $37.7 million outstanding as January 31, 2022 and October 31, 2021.
On December 1, 2021, we entered into the Fourth and Fifth Amendments to the Credit Agreement with Bank of America, N.A., as administrative agent (“Bank of America”), and Farm Credit West, PCA (together with Bank of America, the “Lenders”), relating to our Credit Agreement dated as of June 14, 2016, The Fourth and Fifth Amendments, among other terms, included Calavo de Mexico (CDM) as a guarantor, increased the interested rate by 0.5%, and amended the financial covenant requirements as follows:
| ● | The Fixed Charge Coverage Ratio (FCCR) covenant will be waived for the quarters ended October 31, 2021, January 31, 2022 and April 30, 2022. The covenant will resume for the quarter ended July 31, 2022. |
| ● | The quarterly FCCR covenant will be replaced by a cumulative monthly minimum Consolidated EBITDA covenant, with the first measurement to occur as of January 31, 2022 for the three months then ended, and continuing monthly thereafter through June 2022. |
| ● | Consolidated financial statements must be submitted monthly for the month and year-to-date period, beginning with the financial statements for the month of November 2021 and continuing through June 2022. |
The Company also pledged the 1,677,000 shares it holds of Limoneira stock as collateral (which was in addition to the general business assets of the Company that already secure the credit facility).
The above terms and conditions will remain in effect until such time as the Company has certified compliance with a 1.15 to 1.0 minimum FCCR for two consecutive fiscal quarters.
As of January 31, 2022, the Company was not in compliance with the cumulative monthly minimum Consolidated EBITDA covenant, and the Consolidated Leverage Ratio (CLR) covenant. In March 2022, the Company and Bank of America, N.A. have entered into the Sixth Amendment, Limited Waiver, and Limited Consent to Credit Agreement (the “Sixth Amendment”). The Sixth Amendment, among other terms, waived the non-compliance of the financial covenants as of January 31, 2022 and amended the financial covenant requirements as follows:
| ● | The cumulative monthly minimum Consolidated EBITDA testing has been waived and the CLR covenant testing is waived through July 31, 2022. |
| ● | Minimum Consolidated EBITDA of $3 million, $3 million and $5 million for the months of February, March and April 2022, respectively, will be required. |
31
| ● | Monthly cumulative FCCR of 1.20 will be required starting with the quarter ended April 30, 2022, converting to trailing 12 months calculation starting as of October 31, 2022 and quarterly thereafter. For April through September 2022, dividends paid in December 2021 are included on a pro-rata basis. |
The interest rate of the facility increased to BSBY plus 3.0%, until the first business day of the month after we certify that no default or event of default exists for the period ended July 31, 2022, at which point the interest rate will range between BSBY 1.25 – 1.75% based on our CLR. The total facility reduced from $100 million to $80 million and will be limited to a borrowing base consisting of the sum of eligible accounts receivable (80%), eligible US inventory (50%), and Limoneira shares (60%), less grower payables.
We expect to remain in compliance with the Credit Agreement, as so amended, through March 2023.
Contractual Commitments
There have been no other material changes to our contractual commitments from those previously disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, 2021. For a summary of the contractual commitments at October 31, 2021, see Part II, Item 7, in our 2021 Annual Report on Form 10-K.
Impact of Recently Issued Accounting Pronouncements
See Note 1 to the consolidated condensed financial statements included in this Quarterly Report.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts receivable, payable to growers, accounts payable, current and long-term borrowings pursuant to our Credit Facility, and long-term, fixed-rate obligations. All of our financial instruments are entered into during the normal course of operations and have not been acquired for trading purposes. The table below summarizes interest rate sensitive financial instruments and presents principal cash flows in U.S. dollars, which is our reporting currency, and weighted-average interest rates by expected maturity dates, as of January 31, 2022.
(All amounts in thousands) | Expected maturity date January 31, | ||||||||||||||||||||||||
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Thereafter |
| Total |
| Fair Value | ||||||||||
Assets | |||||||||||||||||||||||||
Restricted cash, cash and cash equivalents (1) | $ | 8,796 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 8,796 | $ | 8,796 | |||||||||
Accounts receivable (1) |
| 89,467 |
| — |
| — |
| — |
| — |
| — |
| 89,467 |
| 89,467 | |||||||||
Advances to suppliers (1) |
| 9,951 |
| — |
| — |
| — |
| — |
| — |
| 9,951 |
| 9,951 | |||||||||
Liabilities | |||||||||||||||||||||||||
Payable to growers (1) | $ | 37,798 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 37,798 | $ | 37,798 | |||||||||
Accounts payable (1) |
| 11,848 |
| — |
| — |
| — |
| — |
| — |
| 11,848 |
| 11,848 | |||||||||
Borrowings pursuant to credit facilities (1) |
| — |
| — |
| — |
| 64,000 |
| — |
| — |
| 64,000 |
| 64,000 | |||||||||
| (1) | We believe the carrying amounts of cash and cash equivalents, accounts receivable, advances to suppliers, payable to growers, and accounts payable approximate their fair value due to the short maturity of these financial instruments and the carrying amount of borrowings pursuant to credit facilities approximates fair market value due to the variable rate of interest. |
We were not a party to any derivative instruments during the fiscal year. It is currently our intent not to use derivative instruments for speculative or trading purposes. Additionally, we do not use any hedging or forward contracts to offset market volatility.
Our Mexican-based operations transact a significant portion of business in Mexican pesos. Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy domestic cash needs. We do not currently use derivative instruments to hedge fluctuations in the Mexican peso to U.S. dollar exchange rates. Management does, however, evaluate this opportunity from time to time. Total foreign currency remeasurement losses for the three months ended January 31, 2022, net of gains, was $0.6 million. Total foreign currency remeasurement gains for the three months ended January 31, 2021, net of losses, was $1.1 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 January 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in litigation arising in the ordinary course of our business. We have provided information about certain legal proceedings in which we are involved in Note 7 to the consolidated condensed financial statements included in this Quarterly Report for further information.
ITEM 1A. RISK FACTORS
For a discussion of our risk factors, see Part 1, item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, 2021. There have been no material changes from the risk factors set forth in such Annual Report on Form 10-K. However, the risks and uncertainties that we face are not limited to those set forth in the 2021 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock.
ITEM 5. OTHER INFORMATION
Because this Quarterly Report on Form 10-Q is being filed within four business days after the applicable triggering events, the information below is being disclosed under this Item 5 instead of under Item 1.01 (Entry into a Material Definitive Agreement) and Item 2.03 (Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of Registrant) of Form 8-K.
On March 14, 2022, the Company and Bank of America, N.A., as administrative agent (“Bank of America”), and Farm Credit West, PCA (together with Bank of America, the “Lenders”) entered into the Sixth Amendment, Limited Waiver, and Limited Consent to Credit Agreement (the “Sixth Amendment”). The Sixth Amendment, among other terms, waived non-compliance with certain financial covenants as of January 31, 2022 and amended the financial covenant requirements as follows:
| ● | The cumulative monthly minimum Consolidated EBITDA testing has been waived and the CLR covenant testing is waived through July 31, 2022. |
| ● | Minimum Consolidated EBITDA of $3 million, $3 million and $5 million for the months of February, March and April 2022, respectively, will be required. |
| ● | Monthly cumulative FCCR of 1.20 will be required starting with the quarter ended April 30, 2022, converting to trailing 12 months calculation starting as of October 31, 2022 and quarterly thereafter. For April through September 2022, dividends paid in December 2021 are included on a pro-rata basis. |
The interest rate of the facility increased to BSBY plus 3.0%, until the first business day of the month after we certify that no default or event of default exists for the period ended July 31, 2022, at which point the interest rate will range between BSBY plus 1.25 – 1.75% based on our CLR. The total facility reduced from $100 million to $80 million and will be limited to a borrowing base consisting of the sum of eligible accounts receivable (80%), eligible US inventory (50%), and Limoneira shares (60%), less grower payables.
34
ITEM 6. EXHIBITS
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | Fifth Amendment to Credit Agreement, dated December 1, 2021. | |
10.5 | Employment Agreement, between the Company and Brian Kocher, dated December 20, 2021. | |
10.6 | Severance and Release Agreement, between the Company and Brian Kocher, dated December 20, 2021. | |
31.1 | ||
31.2 | ||
32.1 | ||
101 | The following financial information from the Quarterly Report on Form 10-Q of Calavo Growers, Inc. for the quarter ended January 31, 2022, formatted in Inline XBRL (Extensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of January 31, 2022 and October 31, 2021; (2) Consolidated Condensed Statements of Operations for the three months ended January 31, 2022 and 2021; (3) Consolidated Condensed Statements of Cash Flows for the three months ended January 31, 2022 and 2021; (4) Consolidated Statements of Shareholders’ Equity for the three months ended January 31, 2022 and 2021; and (5) Notes to Consolidated Condensed Financial Statements. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL). |
* | Filed with this Form 10-Q. |
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Calavo Growers, Inc. | ||
(Registrant) | ||
Date: March 14, 2022 | ||
By | /s/ Brian Kocher | |
Brian Kocher | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: March 14, 2022 | ||
By | /s/ Mariela Matute | |
Mariela Matute | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||
36