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

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended January 31, 2015

OR

Commission file number: 000-33385

CALAVO GROWERS, INC.

(Exact name of registrant as specified in its charter)

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):

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 January 31, 2015 was 17,316,401.

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CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo Growers, Inc. and its consolidated subsidiaries (Calavo, the Company, we, us or our) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, 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.

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CALAVO GROWERS, INC.

INDEX

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(in thousands)

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

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)

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

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CALAVO GROWERS, INC.

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

(in thousands)

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

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

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

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of the business

Business

Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a global leader in the avocado industry and an expanding 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, Mexico, and Chile. 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

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

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):

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

For the three months ended January 31, 2015 and 2014, inter-segment sales and cost of sales for Fresh products totaling $9.9 million and $9.0 million were eliminated in consolidation. For three months ended January 31, 2015 and 2014, inter-segment sales and cost of sales for Calavo Foods totaling $3.7 million were eliminated in consolidation.

3. Inventories

Inventories consist of the following (in thousands):

During the three months ended January 31, 2015 and 2014, we were not required to, and did not, record any provisions to reduce our inventories to the lower of cost or market.

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 January 31, 2015 and 2014, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $0.6 million and $0.4 million. Accounts payable to these Board members were $0.6 million and $0.1 million at January 31, 2015 and October 31, 2014.

During the first quarter of fiscal 2015 and 2014, we received $0.1 million as dividend income from Limoneira.

The three previous owners and current executives of RFG have a majority ownership of certain entities that provide various services to RFG. RFG’s California operating facility leases a building from LIG Partners, LLC (LIG) pursuant to an operating lease. LIG is majority owned by an entity owned by such three executives of RFG. For the three months ended January 31, 2015 and 2014, total rent paid to LIG was $0.1 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 January 31, 2015 and 2014, total rent paid to THNC was $0.1 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 January 2015 and 2014, total sales made to Third Coast were $0.1 million and $0.2 million. For the three months ended January 31, 2015 and 2014, total purchases made from Third Coast were $0.1 million. Amounts due from Third Coast were $0.4 million as of January 31, 2015 and October 31, 2014. Amounts due to Third Coast were less than $0.1 million as of January 31, 2015 and October 31, 2014.

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

5. Other assets

Other assets consist of the following (in thousands):

Intangible assets consist of the following (in thousands):

We have recorded $0.3 million of amortization expense for the first quarter of fiscal 2015. We anticipate recording amortization expense of approximately $1.0 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 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.

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

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.

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

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

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

At January 31, 2015, outstanding stock options had a weighted-average remaining contractual term of 3.4 years. At January 31, 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 January 31, 2015.

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

At January 31, 2015, outstanding stock options had a weighted-average remaining contractual term of 5.4 years. At January 31, 2015, exercisable stock options had a weighted-average remaining contractual term of 4.0 years. The total recognized stock-based compensation expense was $0.1 million for the three months ended January 31, 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

From time to time, we are also involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

8. Fair value measurements

A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).

The following table sets forth our financial assets and liabilities as of January 31, 2015 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:

The following table sets forth our financial assets as of January 31, 2015 that are measured on a non-recurring basis during the period, segregated by level within the fair value hierarchy:

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

There was no contingent consideration expense in the first quarter of 2015 and there will be no future expenses related to this acquisition.

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (CONTINUED)

(UNAUDITED)

9. Noncontrolling interest

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

10. Subsequent events

On February 6, 2015, our executive officers were granted a total of 49,955 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 1, 2016.

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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-month periods ended January 31, 2015 and 2014:

Summary

Net sales for the first quarter of fiscal 2015, compared to fiscal 2014, increased by $26.6 million, or 15.8%. The increase in sales, when compared to the same corresponding prior year period, is related to an increase in sales across all segments. We experienced an increase in RFG sales during the first quarter of fiscal 2015, which was due primarily to increased sales from cut fruit and vegetables platters, as well as an increase in sales of deli products. We experienced an increase in Fresh product sales during the first quarter of fiscal 2015, which was due primarily to increased sales of Mexican sourced avocados. Partially offsetting this increase in Fresh product sales, however, was a decrease in sales of Chilean and California sourced avocados, papayas and tomatoes. We experienced an increase in our Calavo Foods segment during the first quarter of fiscal 2015, which was due primarily to an increase in the sales of our guacamole products. 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.

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Fresh products

Net sales delivered by the Fresh products business increased by approximately $11.9 million, or 12.0%, for the first quarter of fiscal 2015, when compared to the same period for fiscal 2014. As discussed above, this increase in Fresh product sales during the first quarter of fiscal 2015 was primarily related to increased sales of Mexican sourced avocados. These increases were partially offset, however, by decreased sales from Chilean and California sourced avocados, papayas and tomatoes. See details below.

Sales of Mexican sourced avocados increased $14.5 million, or 16.9% for the first quarter of 2015, when compared to the same prior year period. The increase in Mexican sourced avocados was primarily due to an increase in the sales price per carton, which increased by approximately 8.5%. We attribute this increase primarily to an overall increase in the demand of avocados. In addition to this increase, was an increase in the pounds sold, which increased by approximately 6.1 million pounds of avocados sold, or 7.7%, when compared to the same prior year period.

Partially offsetting this increase was a decrease in sales of Chilean sourced avocados, which decreased $1.4 million, or 94.6% for the first 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 1.3 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 January 31, 2015.

Sales of papayas decreased $0.6 million, or 21.7%, for the first quarter of fiscal 2015, when compared to the same period for fiscal 2014. The decrease in sales for papayas is primarily due to a decrease in the number of cartons sold, partially offset by an increase in the per carton selling price. We attribute this decrease in cartons sold due to weather related issues.

Sales of tomatoes decreased $0.5 million, or 7.0%, for the first quarter of fiscal 2015, when compared to the same period for fiscal 2014. The decrease in sales for tomatoes is primarily due to a decrease in the per carton selling price which decreased approximately 22.8%. This decrease in the selling price is due to a higher supply of tomatoes in the market. Partially offsetting this decrease is an increase in the number of cartons sold which increased approximately 20.5%.

Sales of California sourced avocados decreased $0.2 million, or 10.3%, for the first quarter of fiscal 2015, when compared to the same period for fiscal 2014. The decrease in California sourced avocados was due to a decrease in pounds sold. California sourced avocados sales reflect a decrease in 0.6 million pounds of avocados sold, or 32.4%, when compared to the same prior year period. We attribute most of this increase in volume to the larger California crop in fiscal 2013, which contributed to more deliveries at the beginning of the first quarter of 2014. Partially offsetting this decrease, however, was the increase in the sales price per carton, which increased by approximately 32.7%. We attribute this increase primarily to an overall increase in the demand of avocados.

We anticipate that California avocado sales will experience an increase during our second fiscal quarter of 2015, as compared to the first quarter of 2015. Additionally, we believe that the sales volume of California grown avocados will increase in second quarter of fiscal 2015, when compared to the same prior year period. This increase is due to a larger expected California avocado crop during fiscal 2015.

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

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Calavo Foods

Sales for Calavo Foods for the quarter ended January 31, 2015, when compared to the same period for fiscal 2014, increased $1.8 million, or 13.7%. This increase is due to an increase in sales of prepared guacamole products which increased approximately $1.8 million, or 14.5%, in the first quarter of fiscal year 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 12.4%.

RFG

Sales for RFG for the quarter ended January 31, 2015, when compared to the same period for fiscal 2014, increased $12.9 million, or 23.3%. This increase is due primarily to increased sales from packaged fresh cut fruit, packaged fresh cut vegetables and fresh prepared and packaged deli style salads, sandwiches and wraps. The overall increase in sales is primarily due to an increase in sales volume. Collectively, cut fruit, cut vegetable, and deli product sales increased 1.3 million units, or 18.7%. We believe the overall increase in sales volume is primarily due to an increase in demand for the variety of innovative packaged fresh food 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-month periods ended January 31, 2015 and 2014:

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 $4.2 million, or 30.5%, for the first quarter of fiscal 2015 when compared to the same period for fiscal 2014. The increase in our gross margin, when compared to the same corresponding prior year period, is related to an increase in gross margin across all segments.

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Fresh products

During our first fiscal quarter of 2015, as compared to the same prior year period, the increase in our Fresh products segment gross margin percentage was primarily the result of increased margins for Mexican sourced avocados that increased from 7.8% in 2014 to 9.6% in 2015. In the first fiscal quarter of 2015, we were able to manage the spread between the sales price and the fruit cost of Mexican sourced avocados more effectively, as average fruit costs increased 6.4%, we were able to increase sales prices by approximately 8.5%. In addition, the U.S. Dollar to Mexican Peso exchange rate strengthened in the first fiscal quarter of 2015. 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 and Calavo Foods segments. Partially offsetting this increase in gross margin percentage was a decrease in the gross margin percentage for California sourced avocados. Our gross margin percentage for California sourced avocados decreased due to a decrease in pounds sold, compared to the same period in fiscal 2014. We attribute much of this decrease in volume to the smaller California avocado crop in the prior year that carried over in the current year.

Calavo Foods

The Calavo Foods segment gross margin percentage during our first fiscal quarter of 2015, when compared to the same prior year period, increased primarily due a decrease in the fruit cost per pound by approximately 35.3%. In addition, production cost per pound decreased by approximately 12.1%. Production costs per pound decreased due to an overall increase in the pounds produced in the first quarter of 2015, compared to the same prior year period. In addition, the strengthening of the U.S. Dollar compared to the Mexican Peso, decreased our per pound costs. 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 Fresh products and Calavo Foods segments.

RFG

The RFG segment gross margin percentage during our first fiscal quarter of 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 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 January 31, 2015, when compared to the same period for fiscal 2014, increased $12.9 million, or 23.3%.

Selling, General and Administrative

Selling, general and administrative expenses include costs of marketing and advertising, sales expenses and other general and administrative costs. Selling, general and administrative expenses increased $1.2 million, or 14.7%, for the three months ended January 31, 2015 when compared to the same period for fiscal 2014. This increase was primarily to higher corporate costs, including, but not limited to, salaries (totaling approximately $0.5 million), audit fees (totaling approximately $0.4 million), consulting fees (totaling approximately $0.2 million), employee benefits (totaling approximately $0.2 million), stock option expense (totaling approximately $0.1 million), promotions and advertising (totaling approximately $0.1 million), other administration fees (totaling approximately $0.1 million) and data processing (totaling approximately $0.1 million), partially offset by decreases due to the start-up operations of FreshRealm (totaling approximately $0.5 million).

As mentioned above, salaries increased $0.5 million, for the three months ended January 31, 2015 when compared to the same period for fiscal 2014. Of this increase, $0.4 million is due to increased personnel at RFG, due to expected increases in sales to FreshRealm in the remainder of fiscal 2015. We anticipate that this increase in salaries will continue through the rest of fiscal 2015.

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Contingent Consideration Related to RFG Acquisition

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 in the first quarter of 2015 and there will be no future contingent consideration expense related to this acquisition.

Provision for Income Taxes

For the first three months of fiscal 2015, our provision for income taxes was $2.9 million, as compared to a benefit of $2.1 million for the comparable prior year period. We expect our effective tax rate to be approximately 35.3% during fiscal 2015. The prior year benefit for income taxes of $2.1 million is attributable to the revaluation adjustment in the first quarter of 2014 of $9.3 million related to contingent consideration.

Liquidity and Capital Resources

Cash used by operating activities was $1.6 million for the three months ended January 31, 2015, compared to $6.6 million used by operations for the similar period in fiscal 2014. Operating cash flows for the three months ended January 31, 2015 reflect our net income of $5.4 million, net non-cash charges (depreciation and amortization, and stock compensation expense) of $2.2 million and net of cash used in the components of our operating capital of approximately $9.1 million.

Cash used in operations caused by working capital changes, when compared to October 31, 2014, includes a net increase in accounts receivable of $13.7 million, a net increase in prepaid and other current assets of $2.8 million, and a net increase in income tax receivable of $1.6 million, partially offset by, a decrease in inventory of $3.9 million, a net decrease in advances to suppliers of $2.8 million, an increase in payable to growers of $1.2 million, an increase in trade accounts payable and accrued expenses of $1.0 million, and a net decrease in other assets of $0.1 million.

The increase in our accounts receivable, as of January 31, 2015, when compared to October 31, 2014, primarily reflects higher sales recorded in the month of January 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

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Memo. The decrease in inventory is primarily related to a decrease of inventory on hand at January 31, 2015 compared to October 31, 2014. The increase in our payable to growers primarily reflects an increase in California fruit delivered in the month of January 2015, as compared to October 31, 2014. The increase in accounts payable and accrued expenses is primarily related to an increase in our payables related to tomatoes and Mexican avocados.

Cash used in investing activities was $3.7 million for the three months ended January 31, 2015 and related principally to the purchase of property, plant and equipment items.

Cash provided by financing activities was $3.7 million for the three months ended January 31, 2015, which related principally to borrowings on our credit facilities totaling $17.7 million, partially offset by the payment of our $13.0 million dividend and payments on long-term obligations if $1.0 million.

Our principal sources of liquidity are our existing cash balances, cash generated from operations and amounts available for borrowing under our existing credit facilities. Cash and cash equivalents as of January 31, 2015 and October 31, 2014 totaled $5.1 million and $6.7 million. Our working capital at January 31, 2015 was $25.5 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 January 31, 2015 and October 31, 2014. Under these credit facilities, we had $53.6 million and $35.9 million outstanding as January 31, 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 January 31, 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 unaudited consolidated condensed financial statements that are included in this Quarterly Report on Form 10-Q.

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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 January 31, 2015.

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 January 31, 2015, and 2014, net of gains, was $1.0 million and $0.2 million.

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, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

From time to time, we are also involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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INDEX TO EXHIBITS

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