Annual Statements Open main menu

CALAVO GROWERS INC - Quarter Report: 2015 April (Form 10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended April 30, 2015

OR

 

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

Commission file number: 000-33385

 

 

CALAVO GROWERS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

1141-A Cummings Road

Santa Paula, California 93060

(Address of principal executive offices) (Zip code)

(805) 525-1245

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Registrant’s number of shares of common stock outstanding as of April 30, 2015 was 17,383,295

 

 

 

 

 


Table of Contents

CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo Growers, Inc. and its consolidated subsidiaries (Calavo, the Company, we, us or our) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flows, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of restructuring and 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; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic trends and events; the competitive pressures faced by Calavo’s businesses; the development and transition of new products and services (and the enhancement of existing products and services) to meet customer needs; integration and other risks associated with business combinations; the hiring and retention of key employees; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including, but not limited to, the items discussed in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014, and those detailed from time to time in our other filings with the Securities and Exchange Commission. Calavo assumes no obligation and does not intend to update these forward-looking statements.

 

2


Table of Contents

CALAVO GROWERS, INC.

INDEX

 

         PAGE  

PART I. FINANCIAL INFORMATION

  
Item 1.   Financial Statements (unaudited):   
  Consolidated Condensed Balance Sheets – April 30, 2015 and October 31, 2014      4   
  Consolidated Condensed Statements of Operations (unaudited) – Three Months and Six Months Ended April 30, 2015 and 2014      5   
 

Consolidated Condensed Statements of Comprehensive Income (Loss) – Three Months and Six Months Ended April 30, 2015 and 2014

     6   
  Consolidated Condensed Statements of Cash Flows – Six Months Ended April 30, 2015 and 2014      7   
  Notes to Consolidated Condensed Financial Statements      8   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      23   
Item 4.   Controls and Procedures      23   
PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      24   
Item 1A.   Risk Factors      24   
Item 6.   Exhibits      24   
  Signatures      25   

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)

 

     April 30,      October 31,  
     2015      2014  

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 9,269       $ 6,744   

Accounts receivable, net of allowances of $3,411 (2015) and $3,248 (2014)

     80,493         56,618   

Inventories, net

     31,045         30,975   

Prepaid expenses and other current assets

     20,909         19,528   

Advances to suppliers

     76         3,258   

Income taxes receivable

     2,460         2,627   

Deferred income taxes

     3,294         3,294   
  

 

 

    

 

 

 

Total current assets

  147,546      123,044   

Property, plant, and equipment, net

  60,855      57,352   

Investment in Limoneira Company

  39,653      44,355   

Investment in unconsolidated entities

  18,360      18,380   

Deferred income taxes

  13,932      12,287   

Goodwill

  18,262      18,262   

Other assets

  8,954      9,784   
  

 

 

    

 

 

 
$ 307,562    $ 283,464   
  

 

 

    

 

 

 

Liabilities and shareholders’ equity

Current liabilities:

Payable to growers

$ 25,078    $ 6,660   

Trade accounts payable

  19,125      15,065   

Accrued expenses

  20,605      25,303   

Short-term borrowings

  45,150      35,900   

Dividend payable

  —        12,970   

Current portion of long-term obligations

  4,635      5,099   
  

 

 

    

 

 

 

Total current liabilities

  114,593      100,997   

Long-term liabilities:

Long-term obligations, less current portion

  1,168      2,791   
  

 

 

    

 

 

 

Total long-term liabilities

  1,168      2,791   

Commitments and contingencies

Noncontrolling interest, Calavo Salsa Lisa

  270      270   

Shareholders’ equity:

Common stock, $0.001 par value, 100,000 shares authorized; 17,383 (2015) and 17,295 (2014) shares issued and outstanding

  17      17   

Additional paid-in capital

  145,906      144,496   

Accumulated other comprehensive income

  9,657      12,713   

Retained earnings

  35,951      22,180   
  

 

 

    

 

 

 

Total shareholders’ equity

  191,531      179,406   
  

 

 

    

 

 

 
$ 307,562    $ 283,464   
  

 

 

    

 

 

 

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

 

4


Table of Contents

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

 

    

Three months ended

April 30,

   

Six months ended

April 30,

 
     2015     2014     2015     2014  

Net sales

   $ 221,589      $ 194,894      $ 416,380      $ 363,059   

Cost of sales

     198,614        176,002        375,600        330,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  22,975      18,892      40,780      32,533   

Selling, general and administrative

  9,986      9,145      19,496      17,437   

Contingent consideration related to RFG acquisition

  —        7,036      —        16,254   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  12,989      2,711      21,284      (1,158

Interest expense

  (236   (292   (459   (548

Other income, net

  309      270      426      405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  13,062      2,689      21,251      (1,301

Provision (benefit) for income taxes

  4,590      1,433      7,480      (643
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  8,472      1,256      13,771      (658

Add: Net loss attributable to noncontrolling interest

  —        298      —        446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Calavo Growers, Inc

$ 8,472    $ 1,554    $ 13,771    $ (212
  

 

 

   

 

 

   

 

 

   

 

 

 

Calavo Growers, Inc.’s net income (loss) per share:

Basic

$ 0.49    $ 0.10    $ 0.80    $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

$ 0.49    $ 0.09    $ 0.79    $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of shares used in per share computation:

Basic

  17,300      15,755      17,298      15,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  17,382      17,176      17,343      15,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

 

    

Three months ended

April 30,

   

Six months ended

April 30,

 
     2015     2014     2015     2014  

Net income (loss)

   $ 8,472      $ 1,256      $ 13,771      $ (658
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

Unrealized holding income (loss) on available for sales investments arising during period

  3,699      3,803      (4,702   (5,825

Income tax benefit (expense) related to items of other comprehensive income (loss)

  (1,295   (1,483   1,646      2,272   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

  2,404      2,320      (3,056   (3,553
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  10,876      3,576      10,715      (4,211
  

 

 

   

 

 

   

 

 

   

 

 

 

Add: Net loss – noncontrolling interest

  —        298      —        446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) – Calavo Growers, Inc.

$ 10,876    $ 3,874    $ 10,715    $ (3,765
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

     Six months ended
April 30,
 
     2015     2014  

Cash Flows from Operating Activities:

    

Net income (loss)

   $ 13,771      $ (658

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     3,965        3,378   

Provision for losses on accounts receivable

     30        —     

Loss from unconsolidated entities

     20        12   

Interest on contingent consideration

     —          18   

Contingent consideration and non-cash compensation related to the acquisition of RFG

     —          16,442   

Stock-based compensation expense

     719        303   

Deferred income taxes

     —          (6,518

Effect on cash of changes in operating assets and liabilities:

    

Accounts receivable

     (23,905     (9,033

Inventories, net

     (70     (3,588

Prepaid expenses and other current assets

     (1,381     (2,771

Advances to suppliers

     3,182        3,174   

Income taxes receivable

     623        2,036   

Other assets

     25        78   

Payable to growers

     18,419        4,628   

Trade accounts payable and accrued expenses

     (638     5,762   
  

 

 

   

 

 

 

Net cash provided by operating activities

  14,760      13,263   

Cash Flows from Investing Activities:

Acquisitions of property, plant, and equipment

  (6,663   (5,464

Investment in unconsolidated entity

  —        (125
  

 

 

   

 

 

 

Net cash used in investing activities

  (6,663   (5,589

Cash Flows from Financing Activities:

Payment of dividend to shareholders

  (12,970   (11,005

Proceeds on revolving credit facilities, net

  9,250      7,040   

Payments on long-term obligations

  (2,087   (1,928

Exercise of stock options

  235      114   
  

 

 

   

 

 

 

Net cash used in financing activities

  (5,572   (5,779
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

  2,525      1,895   

Cash and cash equivalents, beginning of period

  6,744      8,019   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 9,269    $ 9,914   
  

 

 

   

 

 

 

Noncash Investing and Financing Activities:

Tax benefit related to stock based compensation

$ 456    $ 175   
  

 

 

   

 

 

 

Unrealized investment holding losses

$ (4,702 $ (5,825
  

 

 

   

 

 

 

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

 

7


Table of Contents

CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Description of the business

Business

Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a global leader in the avocado industry and an expanding 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 food distributors, produce wholesalers, supermarkets, and restaurants on a worldwide basis. We procure avocados principally from California and Mexico. Through our various operating facilities, we sort, pack, and/or ripen avocados, tomatoes, pineapples and/or Hawaiian grown papayas. Additionally, we also produce salsa and prepare ready-to-eat produce and deli products.

The accompanying unaudited consolidated condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2014.

Recently Adopted Accounting Pronouncements

In July 2013, the FASB issued a new accounting standard requiring the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the Consolidated Balance Sheets when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The adoption of this standard had no impact on our financial statements.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We are required to adopt the amendments in the first quarter of fiscal 2018. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We do not expect the adoption of these amendments to have a material impact on our financial statements.

In April 2014, the FASB issued guidance which changes the criteria for identifying a discontinued operation. The guidance limits the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. We are required to adopt the guidance in the first quarter of fiscal 2016, with early adoption permitted for transactions that have not been reported in financial statements previously issued. We do not expect the adoption of this guidance to have a material impact on our financial statements

 

8


Table of Contents
2. Information regarding our operations in different segments

We report our operations in three different business segments: (1) Fresh products, (2) Calavo Foods, and (3) RFG. These three business segments are presented based on how information is used by our Chief Executive Officer to measure performance and allocate resources. The Fresh products segment includes all operations that involve the distribution of avocados and other fresh produce products. The Calavo Foods segment represents all operations related to the purchase, manufacturing, and distribution of prepared products, including guacamole and salsa. The RFG segment represents all operations related to the manufacturing and distribution of fresh-cut fruit, ready-to-eat vegetables, recipe-ready vegetables and deli meat products. Selling, general and administrative expenses, as well as other non-operating income/expense items, are evaluated by our Chief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them to, our operating segments. The following table sets forth sales by product category, by segment (in thousands):

 

     Three months ended April 30, 2015     Three months ended April 30, 2014  
     Fresh
products
    Calavo
Foods
    RFG     Total     Fresh
products
    Calavo
Foods
    RFG     Total  

Third-party sales:

                

Avocados

   $ 125,744      $ —        $ —        $ 125,744      $ 106,713      $ —        $ —        $ 106,713   

Tomatoes

     9,606        —          —          9,606        12,590        —          —          12,590   

Papayas

     1,898        —          —          1,898        3,139        —          —          3,139   

Pineapples

     635        —          —          635        1,858        —          —          1,858   

Other fresh products

     107        —          —          107        80        —          —          80   

Food service

     —          12,126        —          12,126        —          12,674        —          12,674   

Retail and club

     —          5,458        69,468        74,926        —          5,533        56,339        61,872   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross sales

  137,990      17,584      69,468      225,042      124,380      18,207      56,339      198,926   

Less sales incentives

  (137   (2,691   (625   (3,453   (428   (3,090   (514   (4,032
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

$ 137,853    $ 14,893    $ 68,843    $ 221,589    $ 123,952    $ 15,117    $ 55,825    $ 194,894   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six months ended April 30, 2015     Six months ended April 30, 2014  
     Fresh
products
    Calavo
Foods
    RFG     Total     Fresh
products
    Calavo
Foods
    RFG     Total  

Third-party sales:

                

Avocados

   $ 228,169      $ —        $ —        $ 228,169      $ 196,077      $ —        $ —        $ 196,077   

Tomatoes

     15,659        —          —          15,659        19,096        —          —          19,096   

Papayas

     4,418        —          —          4,418        6,424        —          —          6,424   

Pineapples

     1,630        —          —          1,630        2,755        —          —          2,755   

Other fresh products

     334        —          —          334        144        —          —          144   

Food service

     —          23,648        —          23,648        —          22,645        —          22,645   

Retail and club

     —          11,120        138,620        149,740        —          11,055        112,872        123,927   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross sales

  250,210      34,768      138,620      423,598      224,496      33,700      112,872      371,068   

Less sales incentives

  (708   (5,252   (1,258   (7,218   (822   (5,727   (1,460   (8,009
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

$ 249,502    $ 29,516    $ 137,362    $ 416,380    $ 223,674    $ 27,973    $ 111,412    $ 363,059   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

9


Table of Contents
     Fresh
products
     Calavo
Foods
     RFG      Total  

Three months ended April 30, 2015

           

Net sales

   $ 137,853       $ 14,893       $ 68,843       $ 221,589   

Cost of sales

     126,954         9,280         62,380         198,614   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

$ 10,899    $ 5,613    $ 6,463    $ 22,975   
  

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended April 30, 2014

Net sales

$ 123,952    $ 15,117    $ 55,825    $ 194,894   

Cost of sales

  114,269      11,294      50,439      176,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

$ 9,683    $ 3,823    $ 5,386    $ 18,892   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended April 30, 2015 and 2014, inter-segment sales and cost of sales for Fresh products totaling $9.3 million and $8.6 million were eliminated. For the three months ended April 30, 2015 and 2014, inter-segment sales and cost of sales for Calavo Foods totaling $3.8 million and $3.9 million were eliminated.

 

     Fresh
products
     Calavo
Foods
     RFG      Total  

Six months ended April 30, 2015

           

Net sales

   $ 249,502       $ 29,516       $ 137,362       $ 416,380   

Cost of sales

     229,886         20,310         125,404         375,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

$ 19,616    $ 9,206    $ 11,958    $ 40,780   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended April 30, 2014

Net sales

$ 223,674    $ 27,973    $ 111,412    $ 363,059   

Cost of sales

  207,783      21,558      101,185      330,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

$ 15,891    $ 6,415    $ 10,227    $ 32,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the six months ended April 30, 2015 and 2014, inter-segment sales and cost of sales for Fresh products totaling $19.1 million and $17.6 million were eliminated. For the six months ended April 30, 2015 and 2014, inter-segment sales and cost of sales for Calavo Foods totaling $7.5 million and $7.6 million were eliminated.

 

3. Inventories

Inventories consist of the following (in thousands):

 

     April 30,
2015
     October 31,
2014
 

Fresh fruit

   $ 17,087       $ 15,640   

Packing supplies and ingredients

     6,570         6,324   

Finished prepared foods

     7,388         9,011   
  

 

 

    

 

 

 
$ 31,045    $ 30,975   
  

 

 

    

 

 

 

During the three and six-month periods ended April 30, 2015, we were not required to and did not record any provisions to reduce our inventories to the lower of cost or market. During the three and six-month periods ended April 30, 2014, we recorded $0.3 million in provisions to reduce our inventories to the lower of cost or market.

 

10


Table of Contents
4. Related party transactions

Certain members of our Board of Directors market avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers. During the three months ended April 30, 2015 and 2014, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $5.7 million and $0.8 million. During the six months ended April 30, 2015 and 2014, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $6.3 million and $1.2 million. Amounts payable to these board members were $3.2 million and $0.6 million as of April 30, 2015 and October 31, 2014.

During the three and six months ended April 30, 2015 and 2014, we received $0.1 million as dividend income from Limoneira Company (Limoneira). In addition, we lease office space from Limoneira and paid rental expenses of $0.1 million for the three and six months ended April 30, 2015 and 2014. Harold Edwards, who is a member of our Board of Directors, is the Chief Executive Officer of Limoneira.

In the third quarter of 2015, we expect to finalize a joint venture agreement with Agricola Belher (Belher). Such joint venture will operate under the name of Agricola Don Memo. As of April 30, 2015, we have advanced $5.8 million for construction of greenhouses (bridge loan). In fiscal 2015, the bridge loan will be replaced with a loan from an institutional lender and the bridge loan will be immediately repaid. The advance of $5.8 million has been recorded as a receivable in prepaid and other current assets. During the three months ended April 30, 2015 and 2014, we had tomato sales of $9.6 million and $12.6 million. During the six ended April 30, 2015 and 2014, we had tomato sales of $15.7 million and $19.1 million. Amounts payable to Belher was $2.1 million as of April 30, 2015. We had grower advances due from Belher of $3.0 million as of October 31, 2014. We had infrastructure advances due from Belher of $1.7 million and $2.5 million as of April 30, 2015 and October 31, 2014. Of these infrastructure advances $0.8 million was recorded as receivable in prepaid and other current assets. The remaining portion of these infrastructure advances are recorded in other assets.

The three previous owners and current executives of RFG have a majority ownership of certain entities that provide various services to RFG. RFG’s California operating facility leases a building from LIG partners, LLC (LIG) pursuant to an operating lease. LIG is majority owned by an entity owned by such three executives of RFG. For the three months ended April 30, 2015 and 2014, total rent paid to LIG was $0.1 million. For the six months ended April 30, 2015 and 2014, total rent paid to LIG was $0.3 million. RFG’s Texas operating facility leases a building from THNC, LLC (THNC) pursuant to an operating lease. THNC is majority owned by an entity owned by such three executives of RFG. For the three months ended April 30, 2015 and 2014, total rent paid to THNC was $0.1 million. For the six months ended April 30, 2015 and 2014, total rent paid to THNC was $0.2 million. Additionally, RFG sells cut produce and purchases raw materials, obtains transportation services, and shares costs for certain utilities with Third Coast Fresh Distribution (Third Coast). Third Coast is majority owned by an entity owned by such three executives of RFG. For the three months ended April 30, 2015 and 2014, total sales made to Third Coast were $0.1 million and $0.3 million. For the six months ended April 30, 2015 and 2014, total sales made to Third Coast were $0.2 million and $0.5 million. For the three months April 30, 2015 and 2014, total purchases made from Third Coast were less than $0.1 million. For the six months April 30, 2015 and 2014, total purchases made from Third Coast were $0.1 million. Amounts due from Third Coast were $0.3 million and $0.4 million at April 30, 2015 and October 31, 2014. Amounts due to Third Coast were less than $0.1 million at April 30, 2015 and October 31, 2014.

 

5. Other assets

Other assets consist of the following (in thousands):

 

     April 30,
2015
     October 31,
2014
 

Intangibles, net

   $ 5,270       $ 5,925   

Grower advances

     494         642   

Loan to Agricola Belher

     845         845   

Loan to FreshRealm members

     301         296   

Notes receivable from San Rafael

     1,273         1,343   

Other

     771         733   
  

 

 

    

 

 

 
$ 8,954    $ 9,784   
  

 

 

    

 

 

 

 

11


Table of Contents

Intangible assets consist of the following (in thousands):

 

            April 30, 2015      October 31, 2014  
     Weighted-
Average
Useful Life
     Gross
Carrying
Value
     Accum.
Amortization
    Net
Book
Value
     Gross
Carrying
Value
     Accum.
Amortization
    Net
Book
Value
 

Customer list/relationships

     8.0 years       $ 7,640       $ (3,802   $ 3,838       $ 7,640       $ (3,323   $ 4,317   

Trade names

     8.4 years         2,760         (2,032     728         2,760         (1,900     860   

Trade secrets/recipes

     13.0 years         630         (245     385         630         (220     410   

Brand name intangibles

     indefinite         275         —          275         275         —          275   

Non-competition agreements

     5.0 years         267         (223     44         267         (204     63   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Intangibles, net

$ 11,572    $ (6,302 $ 5,270    $ 11,572    $ (5,647 $ 5,925   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

We have recorded $0.3 million of amortization expense for the second quarter of 2015. We have recorded $0.7 million of amortization expense for the six months ended of fiscal 2015. We anticipate recording amortization expense of approximately $0.7 million for the remainder of fiscal 2015, with $1.2 million of amortization expense for fiscal year 2016. We anticipate recording amortization expense of approximately $1.1 million for each of fiscal years 2017 through 2018. We anticipate recording amortization expense of approximately $0.7 million for fiscal year 2019. We anticipate recording the total remaining amortization expense of approximately $0.2 million for fiscal year 2020 through 2023.

 

6. Stock-Based Compensation

In April 2011, our shareholders approved the Calavo Growers, Inc. 2011 Management Incentive Plan (the “2011 Plan”). All directors, officers, employees and consultants (including prospective directors, officers, employees and consultants) of Calavo and its subsidiaries are eligible to receive awards under the 2011 Plan. Up to 1,500,000 shares of common stock may be issued by Calavo under the 2011 Plan.

On February 6, 2015, our executive officers were granted a total of 55,394 restricted shares. These shares have full voting rights and participate in dividends as if unrestricted. The closing price of our stock on such date was $40.17. These shares vest in one-third increments, on an annual basis, beginning January 8, 2016. These shares were granted pursuant to our 2011 Management Incentive Plan. The total recognized stock-based compensation expense for these grants was $0.2 million for the three and six months ended April 30, 2015.

On January 20, 2015, all 12 of our non-employee directors were granted 1,750 restricted shares each (total of 21,000 shares). These shares have full voting rights and participate in dividends as if unrestricted. The closing price of our stock on such date was $40.39. On January 1, 2016, as long as the directors are still serving on the board, these shares lose their restriction and become non-forfeitable and transferable. These shares were granted pursuant to our 2011 Management Incentive Plan. The total recognized stock-based compensation expense for these grants was $0.3 million for the three and six months ended April 30, 2015.

Stock options are granted with exercise prices of not less than the fair market value at grant date, generally vest over one to five years and generally expire two to five years after the grant date. We settle stock option exercises with newly issued shares of common stock.

We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to vest. We measure the fair value of our stock based compensation awards on the date of grant.

 

12


Table of Contents

A summary of stock option activity, related to our 2005 Stock Incentive Plan, is as follows (in thousands, except for per share amounts):

 

     Number of Shares      Weighted-Average
Exercise Price
     Aggregate
Intrinsic Value
 

Outstanding at October 31, 2014

     17       $ 17.22      

Exercised

     (6    $ 16.00      
  

 

 

       

Outstanding at April 30, 2015

  11    $ 17.94    $ 559   
  

 

 

       

 

 

 

Exercisable at April 30, 2015

  9    $ 19.28    $ 457   
  

 

 

       

 

 

 

At April 30, 2015, outstanding stock options had a weighted-average remaining contractual term of 3.5 years. At April 30, 2015, exercisable stock options had a weighted-average remaining contractual term of 3.1 years. The total recognized stock-based compensation expense was insignificant for the three months ended April 30, 2015.

A summary of stock option activity, related to our 2011 Management Incentive Plan, is as follows (in thousands, except for per share amounts):

 

     Number of Shares      Weighted-Average
Exercise Price
     Aggregate
Intrinsic Value
 

Outstanding at October 31, 2014

     20       $ 22.64      

Exercised

     (6    $ 21.80      
  

 

 

       

Outstanding at April 30, 2015

  14    $ 23.00    $ 389   
  

 

 

       

 

 

 

Exercisable at April 30, 2015

  4    $ 23.48    $ 109   
  

 

 

       

 

 

 

At April 30, 2015, outstanding stock options had a weighted-average remaining contractual term of 5.8 years. At April 30, 2015, exercisable stock options had a weighted-average remaining contractual term of 4.2 years. The total recognized stock-based compensation expense was $0.1 million for the three and six months ended April 30, 2015.

 

7. Other events

Dividend payment

On December 8, 2014, we paid a $0.75 per share dividend in the aggregate amount of $13.0 million to shareholders of record on November 17, 2014.

Contingencies

In January 2015, various class action lawsuits, which have been consolidated into a single lawsuit during our second fiscal quarter, were initiated against the company related to the restatement of previously-issued Financial Statements.

 

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).

 

13


Table of Contents

The following table sets forth our financial assets and liabilities as of April 30, 2015 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:

 

     Level 1      Level 2      Level 3      Total  
     (All amounts are presented in thousands)  

Assets at Fair Value:

           

Investment in Limoneira Company(1)

   $ 39,653       $ —         $ —         $ 39,653   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

$ 39,653    $ —      $ —      $ 39,653   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The investment in Limoneira Company consists of marketable securities in the Limoneira Company stock. We currently own approximately 12% of Limoneira’s outstanding common stock. These securities are measured at fair value by quoted market prices. Limoneira’s stock price at April 30, 2015 and October 31, 2014 equaled $22.94 per share and $25.66 per share. Unrealized gains and losses are recognized through other comprehensive income. Unrealized investment holding income arising during the three months ended April 30, 2015 and 2014 was $3.7 million and $3.8 million. Unrealized investment holding losses arising during the six months ended April 30, 2015 and 2014 was $4.7 million and $5.8 million.

The following table sets forth our financial assets as of April 30, 2015 that are measured on a non-recurring basis during the period, segregated by level within the fair value hierarchy:

 

     Level 1      Level 2      Level 3      Total  
     (All amounts are presented in thousands)  

Assets at Fair Value:

           

Investment in FreshRealm(2)

   $ —         $ —         $ 16,962       $ 16,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

$ —      $ —      $ 16,962    $ 16,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) We estimated the fair value of our noncontrolling interest in FreshRealm by performing a forecast projection analysis when FreshRealm was deconsolidated in fiscal 2014. This analysis was conducted with the consultation from a third party consulting firm. Increases or decreases in the fair value calculation can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue and expense estimates. Significant judgment is employed in determining the appropriateness of these assumptions. Our investment in FreshRealm has been recorded as investment in unconsolidated subsidiaries on our balance sheet.

The following is a reconciliation of the beginning and ending amounts of the contingent consideration for RFG:

 

     Balance at
October 31,
2013
     Interest      Revalue
Adjustment
     Balance
April 30,
2014
 
     (All amounts are presented in thousands)  

RFG contingent consideration

   $ 15,602       $ —         $ 16,442       $ 32,044   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 15,602    $ —      $ 16,442    $ 32,044   
  

 

 

    

 

 

    

 

 

    

 

 

 

There was no contingent consideration expense for the first six months ended of fiscal 2015. In fiscal 2014, RFG’s former owners received the maximum earn-out payment permitted pursuant to the acquisition agreement, as amended, and there will be no future expenses related to this acquisition.

 

14


Table of Contents
9. Noncontrolling interest

The following table reconciles shareholders’ equity attributable to noncontrolling interest related to the Salsa Lisa acquisition and FreshRealm, LLC (in thousands).

Salsa Lisa noncontrolling interest

 

     Three months
ended

April 30, 2015
     Three months
ended

April 30, 2014
 

Noncontrolling interest, beginning

   $ 270       $ (69

Net loss attributable to noncontrolling interest

     —           (35
  

 

 

    

 

 

 

Noncontrolling interest, ending

$ 270    $ (104
  

 

 

    

 

 

 
     Six months
ended

April 30, 2015
     Six months
ended

April 30, 2014
 

Noncontrolling interest, beginning

   $ 270       $ (57

Net loss attributable to noncontrolling interest

     —           (47
  

 

 

    

 

 

 

Noncontrolling interest, ending

$ 270    $ (104
  

 

 

    

 

 

 

FreshRealm noncontrolling interest

 

     Three months
ended

April 30, 2015
     Three months
ended

April 30, 2014
 
  

 

 

    

 

 

 

Noncontrolling interest, beginning

$ —      $ (316

Loss attributable to noncontrolling interest of FreshRealm

  —        (263
  

 

 

    

 

 

 

Noncontrolling interest, ending

$ —      $ (579
  

 

 

    

 

 

 

 

     Six months
ended

April 30, 2015
     Six months
ended

April 30, 2014
 

Noncontrolling interest, beginning

   $ —         $ (180

Loss attributable to noncontrolling interest of FreshRealm

     —           (399
  

 

 

    

 

 

 

Noncontrolling interest, ending

$ —      $ (579
  

 

 

    

 

 

 

 

10. Subsequent events

We have evaluated subsequent events to assess the need for potential recognition or disclosure in this Quarterly Report on Form 10-Q. Such events were evaluated through the date these financial statements were issued. Based upon this evaluation, it was determined that no subsequent events occurred that require recognition in the financial statements.

 

15


Table of Contents
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 year ended October 31, 2014 of Calavo Growers, Inc. (we, Calavo, or the Company).

Recent Developments

Dividend payment

On December 8, 2014, we paid a $0.75 per share dividend in the aggregate amount of $13.0 million to shareholders of record on November 17, 2014.

Net Sales

The following table summarizes our net sales by business segment for each of the three and six-month periods ended April 30, 2015 and 2014:

 

     Three months ended April 30,     Six months ended April 30,  

(in thousands)

   2015     Change     2014     2015     Change     2014  

Net sales to third-parties:

            

Fresh products

   $ 137,853        11.2   $ 123,952      $ 249,502        11.5   $ 223,674   

Calavo Foods

     14,893        (1.5 )%      15,117        29,516        5.5     27,973   

RFG

     68,843        23.3     55,825        137,362        23.3     111,412   
  

 

 

     

 

 

   

 

 

     

 

 

 

Total net sales

$ 221,589      13.7 $ 194,894    $ 416,380      14.7 $ 363,059   
  

 

 

     

 

 

   

 

 

     

 

 

 

As a percentage of net sales:

Fresh products

  62.2   63.6   59.9   61.6

Calavo Foods

  6.7   7.8   7.1   7.7

RFG

  31.1   28.6   33.0   30.7
  

 

 

     

 

 

   

 

 

     

 

 

 
  100.0   100.0   100.0   100.0
  

 

 

     

 

 

   

 

 

     

 

 

 

Summary

Net sales for the three months ended April 30, 2015, compared to fiscal 2014, increased by $26.7 million, or 13.7%. Net sales for the six months ended April 30, 2015, compared to fiscal 2014, increased by $53.3 million, or 14.7%. The increases in sales, when compared to the same corresponding prior year periods, are related to increases in sales from primarily the Fresh products and RFG segments.

For the quarter ended April 30, 2015, our largest percentage increase in sales was RFG sales, followed by our Fresh Products segment, as shown above. Our increase in RFG sales was due primarily to increased sales from cut fruit and vegetables platters, as well as an increase in sales of deli products. Our increase in Fresh product sales during the second quarter of fiscal 2015, was due primarily to increased sales of California sourced avocados. Partially offsetting this increase in Fresh product sales for the second quarter of fiscal 2015, however, were decreases in sales of tomatoes, Chilean sourced avocados, pineapples and papayas. See discussion below for further details.

For the six months ended April 30, 2015, our largest percentage increase in sales was RFG sales, followed by our Fresh Products segment, as shown above. Our increase in RFG sales was due primarily to increased sales from cut fruit and vegetables platters, as well as an increase in sales of deli products. Our increase in Fresh product sales during the six months ended April 30, 2015 was due primarily to increased sales of California and Mexican sourced

 

16


Table of Contents

avocados. Partially offsetting this increase in Fresh product sales for the six months ended April 30, 2015, however, were decreases in sales of tomatoes, Chilean sourced avocados, pineapples and papayas. We experienced an increase in our Calavo Foods segment during the six months ended April 30, 2015, which was due primarily to an increase in the sales of our guacamole products. See discussion below for further details.

While the procurement of fresh avocados related to our Fresh products segment is very seasonal, our Calavo Foods business is generally not subject to a seasonal effect.

Net sales to third parties by segment exclude value-added services billed by our Uruapan packinghouse and our Uruapan processing plant to the parent company. All intercompany sales are eliminated in our consolidated results of operations.

Fresh products

Second Quarter 2015 vs. Second Quarter 2014

Net sales delivered by the Fresh products business increased by approximately $13.9 million, or 11.2%, for the second quarter of fiscal 2015, when compared to the same period for fiscal 2014. As discussed above, this increase in Fresh product sales during the second quarter of fiscal 2015 was primarily related to increased sales of California sourced avocados, partially offset by decreases in sales from tomatoes, pineapples, papayas and Chilean sourced avocados.

Sales of California sourced avocados increased $20.5 million, or 145.8%, for the second quarter of 2015, when compared to the same prior year period. The increase in California sourced avocados was due to an increase in pounds sold. California sourced avocados sales reflect an increase in 15.1 million pounds of avocados sold, or 136.1%, when compared to the same prior year period. We attribute most of this increase in volume to the cyclically larger California avocado crop for fiscal 2015. In addition to this increase, was the increase in the sales price per carton, which increased by approximately 4.1%. We attribute this increase primarily to an overall increase in the demand for avocados.

Partially offsetting this increase were decreases in sales of tomatoes, pineapples and papayas. Sales of tomatoes, decreased $3.0 million, or 23.7%, sales of pineapples decreased $1.2 million, or 65.8%, and sales of papayas decreased $1.1 million, or 38.0%, for the second quarter of fiscal 2015, when compared to the same period for fiscal 2014. The decrease in sales for tomatoes, pineapples and papayas are primarily due to decreases in the number of cartons sold. We attribute all of these decreases in cartons sold due to weather related issues.

Sales of Chilean sourced avocados decreased $1.0 million, or 99.9% for the second quarter of 2015, when compared to the same prior year period. The decrease in Chilean sourced avocados was due to a decrease in pounds sold. Chilean sourced avocados sales reflect a decrease in 1.0 million pounds of avocados sold, when compared to the same prior year period. This decrease in sales is due to the high availability of other avocado sources, and an increased focus on Mexican and California sourced avocados for the three months ended April 30, 2015.

Six Months Ended 2015 vs. Six Months Ended 2014

Net sales delivered by the Fresh products business increased by approximately $25.8 million, or 11.5%, for the six months ended April 30, 2015, when compared to the same period for fiscal 2014. As discussed above, this increase in Fresh product sales during the six months ended April 30, 2015, was primarily related to increased sales of California and Mexican sourced avocados, partially offset by decreases in sales from tomatoes, Chilean sourced avocados, papayas, and pineapples.

Sales of California sourced avocados increased $20.3 million, or 129.8%, for the six months ended April 30, 2015, when compared to the same prior year period. The increase in California sourced avocados was due to an increase in pounds sold. California sourced avocados sales reflect an increase in 14.8 million pounds of avocados

 

17


Table of Contents

sold, or 118.4%, when compared to the same prior year period. We attribute most of this increase in volume to the cyclically larger California avocado crop for fiscal 2015. In addition to this increase, was the increase in the sales price per carton, which increased by approximately 5.2%. We attribute this increase primarily to an overall increase in the demand for avocados.

Sales of Mexican sourced avocados increased $14.3 million, or 8.1%, for the six months ended April 30, 2015, when compared to the same prior year period. The increase in Mexican sourced avocados was primarily due to an increase in the pounds sold, which increased by approximately 9.2 million pounds of avocados sold, or 6.2%, when compared to the same prior year period. In addition to this increase, was the increase in the sales price per carton, which increased by approximately 1.8%. We attribute this increase primarily to an overall increase in the demand for avocados.

Partially offsetting this increase were decreases in sales of tomatoes, pineapples and papayas. Sales of tomatoes, decreased $3.4 million, or 18.0%, sales of papayas decreased $1.7 million, or 29.7% and sales of pineapples decreased $1.1 million, or 40.8%, for the second quarter of fiscal 2015, when compared to the same period for fiscal 2014. The decrease in sales for tomatoes, pineapples and papayas are primarily due to decreases in the number of cartons sold. We attribute all of these decreases in cartons sold due to weather related issues.

Sales of Chilean sourced avocados decreased $2.4 million, or 96.7%, for the six months ended April 30, 2015, when compared to the same prior year period. The decrease in Chilean sourced avocados was due to a decrease in pounds sold. Chilean sourced avocados sales reflect a decrease in 2.4 million pounds of avocados sold, when compared to the same prior year period. This decrease in sales is due to the high availability of other avocado sources, and an increased focus on Mexican and California sourced avocados for the six months ended April 30, 2015.

We anticipate that California avocado sales and volume will both experience increases during our third fiscal quarter of 2015 as compared to the second quarter of 2015.

We anticipate that net sales related to Mexican sourced avocados will increase during our third fiscal quarter of 2015, as compared to the second fiscal quarter of 2015. We anticipate that sales of Mexican grown avocados will increase in the third quarter of fiscal 2015, when compared to the same prior year period. We anticipate that sales volume for tomatoes will increase in the third quarter of fiscal 2015, when compared to the same prior year period.

Calavo Foods

Six Months Ended 2015 vs. Six Months Ended 2014

Sales for Calavo Foods for the six months ended April 30, 2015, when compared to the same period for fiscal 2014, increased $1.5 million, or 5.5%. This increase is due to an increase in sales of prepared guacamole products which increased approximately $1.5 million, or 5.7%, for the six months ended April 30, 2015, when compared to the same prior year period. The increase in sales of prepared guacamole was primarily related to an increase in overall pounds sold, which increased 0.7 million pounds, or 5.9%.

 

18


Table of Contents

RFG

Second Quarter 2015 vs. Second Quarter 2014

Sales for RFG for the quarter ended April 30, 2015, when compared to the same period for fiscal 2014, increased $13.0 million, or 23.3%. This increase is due primarily to increased sales from cut fruit and deli/food service products. Cut fruit and deli/food service product sales for the quarter ended April 30, 2015, when compared to the same period in fiscal 2014, increased $7.9 million, or 28.0% and $4.1 million, or 55.7%. The overall increase in sales is primarily due to an increase in sales volume. We believe the overall increase in sales volume is primarily due to an increase in demand for the variety of innovative products that we offer.

Six Months Ended 2015 vs. Six Months Ended 2014

Sales for RFG for the six months ended April 30, 2014, when compared to the same period for fiscal 2013, increased $26.0 million, or 23.3%. This increase is due primarily to increased sales from cut fruit and deli/food service products. Cut fruit and deli/food service product sales for the six months ended April 30, 2015, when compared to the same period in fiscal 2014, increased $14.4 million, or 26.1% and $7.6 million or 51.3%. The overall increase in sales is primarily due to an increase in sales volume. We believe the overall increase in sales volume is primarily due to an increase in demand for the variety of innovative products that we offer.

Gross Margins

The following table summarizes our gross margins and gross profit percentages by business segment for each of the three and six-month periods ended April 30, 2015 and 2014:

 

     Three months ended April 30,     Six months ended April 30,  

(in thousands)

   2015     Change     2014     2015     Change     2014  

Gross margins:

            

Fresh products

   $ 10,899        12.6   $ 9,683      $ 19,616        23.4   $ 15,891   

Calavo Foods

     5,613        46.8     3,823        9,206        43.5     6,415   

RFG

     6,463        20.0     5,386        11,958        16.9     10,227   
  

 

 

     

 

 

   

 

 

     

 

 

 

Total gross margins

$ 22,975      21.6 $ 18,892    $ 40,780      25.3 $ 32,533   
  

 

 

     

 

 

   

 

 

     

 

 

 

Gross profit percentages:

Fresh products

  7.9   7.8   7.9   7.1

Calavo Foods

  37.7   25.3   31.2   22.9

RFG

  9.4   9.6   8.7   9.2

Consolidated

  10.4   9.7   9.8   9.0

Summary

Our cost of goods sold consists predominantly of fruit costs, packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products and other direct expenses pertaining to products sold. Gross margins increased by approximately $4.1 million, or 21.6%, for the second quarter of fiscal 2015, when compared to the same period for fiscal 2014. Gross margins increased by approximately $8.2 million, or 25.3%, for the first six months of fiscal 2015 when compared to the same period for fiscal 2014. These increases in our gross margin, when compared to the same corresponding prior year periods, are related to increases in gross margin across all segments.

Fresh products

During our three and six months ended April 30, 2015, as compared to the same prior year periods, the increase in our Fresh products segment gross margin percentage was primarily the result of increased margins for Mexican

 

19


Table of Contents

and California sourced avocados. For the second quarter of 2015, compared to the same prior year period, Mexican sourced avocados gross margin increased from 7.1% in 2014 to 8.5% in 2015. For the six months ended April 30, 2015, compared to the same prior year period, Mexican sourced avocados gross margin increased from 7.4% in 2014 to 9.1% in 2015. In fiscal 2015, we were able to manage the spread between the sales price and the fruit cost of Mexican sourced avocados more effectively. For the second quarter of 2015, compared to the same prior year period, average fruit/production costs decreased 1.7%, while we were able to only decrease sales by approximately 0.2%. For the six months ended April 30, 2015, compared to the same prior year period, average fruit/production costs increased 6.2%, while we were able to increase sales by approximately 8.1%. In addition, the U.S. Dollar to Mexican Peso exchange rate strengthened in the three and six months ended April 30, 2015, as compared to the same prior year periods. Note that any significant fluctuations in the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross margins for our Fresh products segment. In addition to this increase in gross margin from Mexican sourced fruit was an increase in the gross margin for California sourced avocados. Our gross margin for California sourced avocados increased due to an increase in pounds sold, compared to the same period in fiscal 2014. We attribute most of this increase in volume to the cyclically larger California avocado crop for fiscal 2015.

Calavo Foods

The Calavo Foods segment gross margin percentage during our three and six months ended April 30, 2015, when compared to the same prior year periods, increased primarily due to a decrease in fruit costs. In addition, for the three and six months ended April 30, 2015, when compared to the same prior year periods, production cost per pound decreased by approximately 4.3% and 8.0%. Production costs per pound decreased due the strengthening of the U.S. Dollar compared to the Mexican Peso. In addition, for fiscal year 2015, compared to prior year, the production cost per pound decreased due to an overall increase in pounds produced. We anticipate that the gross margin percentage for our Calavo Foods segment will experience fluctuations during this fiscal year primarily due to the uncertainty of the cost of fruit that will be used in the production process. In addition, any significant fluctuation in the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross margins for our Calavo Foods segment.

RFG

The RFG segment gross margin percentage during our three and six months ended April 30, 2015, when compared to the same prior year period, decreased primarily as a result of higher fruit costs, higher fixed costs due to recent capacity expansion, and an increase in labor costs associated with ensuring RFG’s product quality standards, as well as an overall increase in production staff to handle the anticipated increase in sales. Sales for RFG for the quarter ended April 30, 2015, when compared to the same period for fiscal 2014, increased $13.0 million, or 23.3%. Sales for RFG for the six months ended April 30, 2014, when compared to the same period for fiscal 2013, increased $26.0 million, or 23.3%.

Selling, General and Administrative

 

     Three months ended April 30,     Six months ended April 30,  
(in thousands)    2015     Change     2014     2015     Change     2014  

Selling, general and administrative

   $ 9,986        9.2   $ 9,145      $ 19,496        11.8   $ 17,437   

Percentage of net sales

     4.5       4.7     4.7       4.8

Selling, general and administrative expenses include costs of marketing and advertising, sales expenses and other general and administrative costs. Selling, general and administrative expenses increased $0.8 million, or 9.2%, for the three months ended April 30, 2015, when compared to the same period for fiscal 2014. This increase was primarily related to higher corporate costs, including, but not limited to, general and administrative costs related to salaries (approximately $0.7 million), stock option expense (approximately $0.3 million), and promotions and advertising (approximately $0.2 million), partially offset by decreases in the start-up operations of FreshRealm (approximately $0.5 million).

 

20


Table of Contents

Selling, general and administrative expenses increased $2.1 million, or 11.8%, for the six months ended April 30, 2015, when compared to the same period for fiscal 2014. This increase was primarily related to higher corporate costs, including, but not limited to, general and administrative costs related to salaries (approximately $1.3 million), stock option expense (approximately $0.4 million), accounting fees (approximately $0.3 million), consulting fees (approximately $0.3 million), and promotion and advertising (approximately $0.2 million), partially offset by a decreases in the start-up operations of FreshRealm (approximately $0.9 million).

Contingent Consideration Related to RFG Acquisition

 

     Three months ended April 30,     Six months ended April 30,  
(in thousands)    2015      Change      2014     2015      Change      2014  

Contingent consideration related to RFG acquisition

   $ —           NM       $ 7,036      $ —           NM       $ 16,254   

Percentage of net sales

     —              3.6     —              4.5

NM-Not Meaningful

We revalued contingent consideration obligations to their fair value and recorded increases or decreases in the fair value into contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations resulted from changes in the assumed timing and amount of revenue and expense estimates, changes in the probability of payment scenarios, as well as changes in capital market conditions, which impacted the discount rate used in the fair valuation. RFG’s results substantially exceeded defined thresholds and expectations and, accordingly, RFG’s former owners received the maximum earn-out payment permitted pursuant to the acquisition agreement in fiscal 2014. This caused the significant increase in contingent consideration for fiscal 2014. There was no contingent consideration expense for the first six months ended of fiscal 2015. In fiscal 2014, RFG’s former owners received the maximum earn-out payment permitted pursuant to the acquisition agreement, as amended, and there will be no future expenses related to this acquisition.

Provision for Income Taxes

 

     Three months ended April 30,     Six months ended April 30,  
(in thousands)    2015     Change     2014     2015     Change     2014  

Provision for income taxes

   $ 4,590        220.3   $ 1,433      $ 7,480        (1,263.3 )%    $ (643

Percentage of income before

            

provision for income taxes

     35.1       53.3     35.2       49.4

For the second quarter of fiscal 2014, our provision for income taxes was $4.6 million, as compared to $1.4 million recorded for the comparable prior year period. For the first six months of fiscal 2014, our provision for income taxes was $7.5 million, as compared to a benefit of $0.6 million recorded for the comparable prior year period. We expect our effective tax rate to be approximately 35.2% during fiscal 2015. The prior year benefit for income taxes of $0.6 million is attributable to the revaluation adjustment related to contingent consideration.

Liquidity and Capital Resources

Cash provided by operating activities was $14.8 million for the six months ended April 30, 2015, compared to $13.3 million provided by operations for the similar period in fiscal 2014. Operating cash flows for the six months ended April 30, 2015 reflect our net income of $13.8 million, net non-cash (depreciation and amortization, stock compensation expense, interest on deferred consideration, provision for losses on accounts receivable, and income from unconsolidated entities) of $4.7 million and a net decrease in the noncash components of our operating capital of approximately $3.7 million.

 

21


Table of Contents

Our operating capital decrease includes a net increase in accounts receivable of $23.9 million, an increase in prepaid expenses and other current assets of $1.3 million, a net decrease in trade accounts payable and accrued expenses of $0.6 million, and an increase in inventory of $0.1 million, partially offset by an increase in payable to growers of $18.4 million, a decrease in advances to suppliers of $3.2 million, and a decrease in income tax receivable of $0.6 million.

The increase in our accounts receivable, as of April 30, 2015, when compared to October 31, 2014, primarily reflects higher sales recorded in the month of April 2015, as compared to October 2014. The increase in prepaid and other current assets is mostly due to short term bridge loans to our expected new joint venture Agricola Don Memo. The decrease in accounts payable and accrued expenses is primarily related to a decrease in our payables related to tomatoes and Mexican avocados. The increase in payable to growers primarily reflects an increase in California fruit delivered in the month of April 2015, as compared to October 2014.

Cash used in investing activities was $6.7 million for the six months ended April 30, 2015 and related primarily to the purchase of property, plant and equipment items.

Cash used in financing activities was $5.6 million for the six months ended April 30, 2015, which related principally to the payment of our $13.0 million dividend and payments on long-term obligations if $2.1 million, partially offset by proceeds from our credit facilities totaling $9.3 million and exercises of stock options of $0.2 million.

Our principal sources of liquidity are our existing cash balances, cash generated from operations and amounts available for borrowing under our existing credit facilities. Cash and cash equivalents as of April 30, 2015 and October 31, 2014 totaled $9.3 million and $6.7 million. Our working capital at April 30, 2015 was $33.0 million, compared to $22.0 million at October 31, 2014.

We believe that cash flows from operations and available credit facilities will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements. We will continue to evaluate grower recruitment opportunities and exclusivity arrangements with food service companies to fuel growth in each of our business segments. Our non-collateralized, revolving credit facilities with Farm Credit West, PCA and Bank of America, N.A. expire in February 2016. Under the terms of these agreements, we are advanced funds for both working capital and long-term productive asset purchases. Total credit available under these combined borrowing agreements was $65 million, with a weighted-average interest rate of 1.7% at April 30, 2015 and October 31, 2014. Under these credit facilities, we had $45.2 million and $35.9 million outstanding as April 30, 2015 and October 31, 2014. These credit facilities contain various financial covenants, the most significant relating to Tangible Net Worth (as defined), Current Ratio (as defined), and Fixed Charge Coverage Ratio (as defined). We were in compliance with all such covenants at April 30, 2015.

Contractual Obligations

There have been no material changes to our contractual commitments from those previously disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, 2014. For a summary of the contractual commitments at October 31, 2014, see Part II, Item 7, in our 2014 Annual Report on Form 10-K.

Impact of Recently Issued Accounting Pronouncements

See footnote 1 to the consolidated condensed financial statements that are included in this Quarterly Report on Form 10-Q.

 

22


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents, accounts receivable, payable to growers, accounts payable, current and long-term borrowings pursuant to our credit facilities with financial institutions, and long-term, fixed-rate obligations. All of our financial instruments are entered into during the normal course of operations and have not been acquired for trading purposes. The table below summarizes interest rate sensitive financial instruments and presents principal cash flows in U.S. Dollars, which is our reporting currency, and weighted-average interest rates by expected maturity dates, as of April 30, 2015.

 

(All amounts in thousands)    Expected maturity date April 30,  
     2015      2016      2017      2018      2019      Thereafter      Total      Fair Value  

Assets

                       

Cash and cash equivalents (1)

   $ 9,269       $ —         $ —         $ —         $ —         $ —         $ 9,269       $ 9,269   

Accounts receivable (1)

     80,493         —           —           —           —           —           80,493         80,493   

Advances to suppliers (1)

     76         —           —           —           —           —           76         76   

Liabilities

                       

Payable to growers (1)

   $ 25,078       $ —         $ —         $ —         $ —         $ —         $ 25,078       $ 25,078   

Accounts payable (1)

     19,125         —           —           —           —           —           19,125         19,125   

Current borrowings pursuant to credit facilities (1)

     45,150         —           —           —           —           —           45,150         45,150   

Fixed-rate long-term obligations (2)

     4,635         707         98         89         92         182         5,803         5,886   

 

(1) We believe the carrying amounts of cash and cash equivalents, accounts receivable, advances to suppliers, payable to growers, accounts payable, and current borrowings pursuant to credit facilities approximate their fair value due to the short maturity of these financial instruments.
(2) Fixed-rate long-term obligations bear interest rates ranging from 1.7% to 5.7% with a weighted-average interest rate of 3.0%. We believe that loans with a similar risk profile would currently yield a return of 2.5%. We project the impact of an increase or decrease in interest rates of 100 basis points would result in a change of fair value of approximately $77,000.

Except as disclosed with the acquisition of Calavo Salsa Lisa we were not a party to any derivative instruments during the fiscal year. It is currently our intent not to use derivative instruments for speculative or trading purposes. Additionally, we do not use any hedging or forward contracts to offset market volatility.

Our Mexican-based operations transact business in Mexican Pesos. Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy domestic cash needs. Historically, the consistency of the spot rate for the Mexican Peso has led to a small-to-moderate impact on our operating results. We do not anticipate using derivative instruments to hedge fluctuations in the Mexican Peso to U.S. Dollar exchange rates during fiscal 2015. Total foreign currency losses for the three months ended April 30, 2015, net of gains, was $0.2 million. Total foreign currency gains for the three months ended April 30, 2014, net of losses, was less than $0.1 million. Total foreign currency losses for the six months ended April 30, 2015 and 2014, net of gains, was$1.2 million and $0.1 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 April 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

23


Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 7 to the Consolidated Financial Statements. Additionally, we are involved in litigation in the ordinary course of business, none of which we believe will have a material adverse impact on our financial position or results of operations.

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, 2014. 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 2014 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock.

ITEM 6. EXHIBITS

 

  10.1 Form of Restricted Stock Award Agreement, dated February 6, 2015.
  31.1 Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2 Certification of Principal Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1 Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
101 The following financial information from the Quarterly Report on Form 10-Q of Calavo Growers, Inc. for the quarter ended April 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of April 30, 2015 and October 31, 2014; (2) Consolidated Condensed Statements of Income for the three and six months ended April 30, 2015 and 2014; (3) Consolidated Condensed Statements of Comprehensive Income for the three and six months ended April 30, 2015 and 2014; (4) Consolidated Condensed Statements of Cash Flows for the six months ended April 30, 2015 and 2014; and (5) Notes to Unaudited Condensed Financial Statements.

 

24


Table of Contents

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: June 9, 2015 By

/s/ Lecil E. Cole

Lecil E. Cole
Chairman of the Board of Directors,
Chief Executive Officer and President
(Principal Executive Officer)
Date: June 9, 2015 By

/s/ Arthur J. Bruno

Arthur J. Bruno
Chief Operating Officer, Chief Financial Officer and Corporate Secretary
(Principal Financial Officer)

 

25


Table of Contents

INDEX TO EXHIBITS

 

Exhibit
Number

  

Description

  10.1    Form of Restricted Stock Award Agreement, dated February 6, 2015.
  31.1    Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Principal Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
101    The following financial information from the Quarterly Report on Form 10-Q of Calavo Growers, Inc. for the quarter ended April 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of April 30, 2015 and October 31, 2014; (2) Consolidated Condensed Statements of Income for the three and six months ended April 30, 2015 and 2014; (3) Consolidated Condensed Statements of Comprehensive Income for the three and six months ended April 30, 2015 and 2014; (4) Consolidated Condensed Statements of Cash Flows for the six months ended April 30, 2015 and 2014; and (5) Notes to Unaudited Condensed Financial Statements.

 

26