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CALAVO GROWERS INC - Quarter Report: 2017 April (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

FORM 10-Q

 

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

 

For the quarterly period ended April 30, 2017

 

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 ☒   No ☐

 

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

 

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

 

Emerging Growth Company ☐

 

 

 

Large accelerated filer ☒ 

Accelerated filer ☐

Non-accelerated filer ☐

Smaller Reporting Company ☐

Emerging growth company ☐

(Do not check if a smaller reporting company)

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. 

 

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

 

Registrant's number of shares of common stock outstanding as of April 30, 2017 was 17,532,179

 


 

 

 


 

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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, legal claims or tax disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic trends and events; the competitive pressures faced by Calavo's businesses; the development and transition of new products and services (and the enhancement of existing products and services) to meet customer needs; integration and other risks associated with business combinations; the hiring and retention of key employees; the resolution of pending investigations, legal claims and tax disputes; and other risks that are described herein, including, but not limited to, the items discussed in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, and those detailed from time to time in our other filings with the Securities and Exchange Commission. Calavo assumes no obligation and does not intend to update these forward-looking statements.

 

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CALAVO GROWERS, INC.

 

INDEX

 

 

    

PAGE

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

 

 

 

 

 

Consolidated Condensed Balance Sheets – April 30, 2017 and October 31, 2016

4

 

 

 

 

Consolidated Condensed Statements of Income – Three Months and Six Months Ended April 30, 2017 and 2016

5

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income – Three Months and Six Months Ended April 30, 2017 and 2016

6

 

 

 

 

Consolidated Condensed Statements of Cash Flows – Three Months and Six Months Ended April 30, 2017 and 2016

7

 

 

 

 

Notes to Consolidated Condensed Financial Statements

8

 

 

 

Item 2. 

Management's Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4. 

Controls and Procedures

27

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

28

 

 

 

Item 1A. 

Risk Factors

28

 

 

 

Item 6. 

Exhibits

28

 

 

 

 

Signatures

29

 

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS 

 

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

April 30, 

 

October 31, 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

Assets

    

 

    

    

 

    

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,468

 

$

13,842

 

Accounts receivable, net of allowances of $3,620 (2017) $2,063 (2016)

 

 

94,970

 

 

70,101

 

Inventories, net

 

 

38,634

 

 

31,849

 

Prepaid expenses and other current assets

 

 

6,391

 

 

14,402

 

Advances to suppliers

 

 

1,491

 

 

4,425

 

Income taxes receivable

 

 

 —

 

 

334

 

Total current assets

 

 

151,954

 

 

134,953

 

Property, plant, and equipment, net

 

 

114,272

 

 

87,837

 

Investment in Limoneira Company

 

 

35,747

 

 

34,036

 

Investment in unconsolidated entities

 

 

27,274

 

 

24,652

 

Deferred income taxes

 

 

14,319

 

 

14,944

 

Goodwill

 

 

18,262

 

 

18,262

 

Other assets

 

 

22,094

 

 

13,249

 

 

 

$

383,922

 

$

327,933

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Payable to growers

 

$

37,480

 

$

20,965

 

Trade accounts payable

 

 

28,346

 

 

22,447

 

Accrued expenses

 

 

26,594

 

 

31,095

 

Income taxes payable

 

 

4,350

 

 

 —

 

Short-term borrowings

 

 

47,500

 

 

19,000

 

Dividend payable

 

 

 —

 

 

15,696

 

Current portion of long-term obligations

 

 

134

 

 

138

 

Total current liabilities

 

 

144,404

 

 

109,341

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term obligations, less current portion

 

 

427

 

 

445

 

Deferred rent

 

 

2,286

 

 

2,307

 

Total long-term liabilities

 

 

2,713

 

 

2,752

 

Commitments and contingencies

 

 

 

 

 

 

 

Noncontrolling interest, Calavo Salsa Lisa

 

 

 —

 

 

771

 

Shareholders' equity:

 

 

 

 

 

 

 

Common stock ($0.001 par value, 100,000 shares authorized; 17,532 (2017) and 17,440 (2016) shares issued and outstanding)

 

 

18

 

 

17

 

Additional paid-in capital

 

 

152,241

 

 

149,748

 

Accumulated other comprehensive income

 

 

7,631

 

 

6,544

 

Noncontrolling interest

 

 

923

 

 

962

 

Retained earnings

 

 

75,992

 

 

57,798

 

Total shareholders' equity

 

 

236,805

 

 

215,069

 

 

 

$

383,922

 

$

327,933

 

 

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

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

 

April 30, 

 

April 30, 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

    

$

270,162

    

$

220,303

    

$

496,716

    

$

424,878

 

Cost of sales

 

 

233,909

 

 

193,496

 

 

438,539

 

 

377,073

 

Gross margin

 

 

36,253

 

 

26,807

 

 

58,177

 

 

47,805

 

Selling, general and administrative

 

 

15,426

 

 

11,658

 

 

29,252

 

 

22,579

 

Operating income

 

 

20,827

 

 

15,149

 

 

28,925

 

 

25,226

 

Interest expense

 

 

(323)

 

 

(185)

 

 

(570)

 

 

(402)

 

Other income (loss), net

 

 

33

 

 

273

 

 

(36)

 

 

514

 

Income before provision for income taxes

 

 

20,537

 

 

15,237

 

 

28,319

 

 

25,338

 

Provision for income taxes

 

 

7,603

 

 

5,561

 

 

10,164

 

 

9,286

 

Net income

 

 

12,934

 

 

9,676

 

 

18,155

 

 

16,052

 

Less: Net loss (income) attributable to noncontrolling interest

 

 

11

 

 

13

 

 

39

 

 

(14)

 

Net income attributable to Calavo Growers, Inc.

 

$

12,945

 

$

9,689

 

$

18,194

 

$

16,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.74

 

$

0.56

 

$

1.05

 

$

0.93

 

Diluted

 

$

0.74

 

$

0.56

 

$

1.04

 

$

0.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares used in per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,426

 

 

17,348

 

 

17,402

 

 

17,335

 

Diluted

 

 

17,539

 

 

17,445

 

 

17,486

 

 

17,415

 

 

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

 

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

 

April 30, 

 

April 30, 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

    

$

12,934

    

$

9,676

    

$

18,155

    

$

16,052

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains

 

 

6,361

 

 

9,179

 

 

1,711

 

 

3,509

 

Income tax expense related to items of other comprehensive income

 

 

(2,322)

 

 

(3,350)

 

 

(625)

 

 

(1,281)

 

Other comprehensive income, net of tax

 

 

4,039

 

 

5,829

 

 

1,086

 

 

2,228

 

Comprehensive income

 

 

16,973

 

 

15,505

 

 

19,241

 

 

18,280

 

Less: Net loss (income) attributable to noncontrolling interest

 

 

11

 

 

13

 

 

39

 

 

(14)

 

Comprehensive income – Calavo Growers, Inc.

 

$

16,984

 

$

15,518

 

$

19,280

 

$

18,266

 

 

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

 

 

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six months ended April 30, 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

    

 

    

    

 

    

 

Net income

 

$

18,155

 

$

16,052

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,575

 

 

4,286

 

Provision for losses on accounts receivable

 

 

1,424

 

 

 —

 

Loss (income) from unconsolidated entities

 

 

403

 

 

(39)

 

Stock compensation expense

 

 

2,658

 

 

1,019

 

Deferred income taxes

 

 

 —

 

 

597

 

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(26,293)

 

 

(17,282)

 

Inventories, net

 

 

(6,785)

 

 

(3,498)

 

Prepaid expenses and other current assets

 

 

(357)

 

 

(3,851)

 

Advances to suppliers

 

 

2,934

 

 

2,820

 

Income taxes receivable/payable

 

 

4,684

 

 

7,580

 

Other assets

 

 

(1,321)

 

 

31

 

Payable to growers

 

 

16,516

 

 

15,686

 

Deferred rent

 

 

(21)

 

 

 —

 

Trade accounts payable and accrued expenses

 

 

6,709

 

 

2,944

 

Net cash provided by operating activities

 

 

23,281

 

 

26,345

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Acquisitions of property, plant, and equipment

 

 

(34,093)

 

 

(9,198)

 

Proceeds received for repayment of San Rafael note

 

 

216

 

 

28

 

Investment in FreshRealm

 

 

(4,625)

 

 

 —

 

Proceeds received for repayment of loan to Agricola Don Memo

 

 

 —

 

 

4,000

 

Net cash used in investing activities

 

 

(38,502)

 

 

(5,170)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Payment of dividend to shareholders

 

 

(15,696)

 

 

(13,907)

 

Proceeds from revolving credit facility

 

 

83,500

 

 

106,380

 

Payments on revolving credit facility

 

 

(55,000)

 

 

(111,300)

 

Purchase of noncontrolling interest of Salsa Lisa

 

 

(1,000)

 

 

 —

 

Payments on long-term obligations

 

 

(22)

 

 

(1,631)

 

Proceeds from stock option exercises

 

 

65

 

 

 —

 

Net cash provided by (used in) in financing activities

 

 

11,847

 

 

(20,458)

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,374)

 

 

717

 

Cash and cash equivalents, beginning of period

 

 

13,842

 

 

7,171

 

Cash and cash equivalents, end of period

 

$

10,468

 

$

7,888

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

Property, plant, and equipment included in trade accounts payable and accrued expenses

 

$

863

 

$

143

 

Unrealized holding losses

 

$

1,711

 

$

3,509

 

 

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 retail grocery, foodservice, club stores, mass merchandisers, food distributors and wholesalers on a worldwide basis.  We procure avocados principally from California and Mexico.  Through our various operating facilities, we (i) sort, pack, and/or ripen avocados, tomatoes and Hawaiian grown papayas, (ii) process and package fresh cut fruit and vegetables, salads, wraps, sandwiches, fresh snacking products and a variety of prepared deli items and (iii) produce and package guacamole and salsa. 

 

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, 2016.

 

Recently Adopted Accounting Pronouncements 

 

In March 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU"), Improvements to Employee Share-Based Payment Accounting, which simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The new standard requires excess tax benefits or deficiencies for share-based payments to be recognized as income tax benefit or expense, rather than within additional paid-in capital, when the awards vest or are settled. Furthermore, cash flows related to excess tax benefits are required to be classified as operating activities in the statement of cash flows rather than financing activities.The Company’s early adoption of the amendments resulted in an income tax benefit of approximately $0.3 million on the Company’s net earnings in the first quarter of fiscal year 2017.

 

In July 2015, the FASB issued an ASU for measuring inventory.  The core principal of the guidance is that an entity should measure inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this new standard beginning in the three months ended January 31, 2017. The adoption of the amendment did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards 

 

In March 2017, the FASB issued an ASU, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included in the same Statement of Earnings captions as other compensation costs arising from services rendered by the covered employees during the period.  The other components of net benefit cost will be presented in the Statement of Earnings separately from service costs.  Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice.  This ASU will be effective for us beginning the first day of our 2019 fiscal year. As this ASU only affects

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presentation and disclosure we do not anticipate a significant impact of adoption on our financial condition, results of operations and cash flows.

 

In January 2017, the FASB issued an ASU, Business Combinations: Clarifying the Definition of a Business, which adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU will be effective for us beginning the first day of our 2019 fiscal year. Early adoption is permitted. We do not expect this ASU to have an impact until an applicable transaction takes place.

 

In January 2017, the FASB issued an ASU, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. The ASU permits an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU will be effective for us beginning the first day of our 2021 fiscal year. Early adoption is permitted. We are evaluating the impact of adoption of this ASU on our financial condition, results of operations and cash flows, and as such, we are not able to estimate the effect the adoption of the new standard will have on our financial statements.

 

In February 2016, the FASB issued an ASU, Leases, which requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This ASU will be effective for us beginning the first day of our 2020 fiscal year. Early adoption is permitted. We are evaluating the impact of adoption of this ASU on our financial condition, results of operations and cash flows, and as such, we are not able to estimate the effect the adoption of the new standard will have on our financial statements.

 

In January 2016, the FASB issued an ASU, which requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. We are evaluating the impact of adoption of this ASU on our financial condition, result of operations and cash flows.

 

In May 2014, the 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 2019. 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 are evaluating the impact of the adoption of this amended accounting standard on our financial condition, result of operations and cash flows, but we do not expect the adoption of this accounting standard to have a significant effect.

 

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 other fresh prepared food products.  Selling, general and administrative expenses, as well as other

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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. Data in the following tables is presented in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  April 30, 2017

 

Three months ended  April 30, 2016

 

 

    

    

 

    

    

 

    

 

 

    

 

 

    

    

 

    

    

 

    

 

 

    

 

 

 

 

 

Fresh

 

Calavo

 

    

 

 

    

 

 

Fresh

 

Calavo

 

    

 

 

    

 

 

 

 

products

 

Foods

 

RFG

 

Total

 

products

 

Foods

 

RFG

 

Total

 

Third-party sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Avocados

 

$

142,924

 

$

 

$

 

$

142,924

 

$

108,197

 

$

 —

 

$

 

$

108,197

 

Tomatoes

 

 

10,994

 

 

 

 

 

 

10,994

 

 

15,765

 

 

 —

 

 

 

 

15,765

 

Papayas

 

 

1,955

 

 

 

 

 

 

1,955

 

 

2,226

 

 

 —

 

 

 

 

2,226

 

Other fresh products

 

 

 6

 

 

 

 

 

 

 6

 

 

299

 

 

 —

 

 

 

 

299

 

Food service

 

 

 

 

14,391

 

 

 

 

14,391

 

 

 —

 

 

12,431

 

 

 

 

12,431

 

Retail and club

 

 

 

 

5,251

 

 

98,028

 

 

103,279

 

 

 —

 

 

5,258

 

 

79,762

 

 

85,020

 

Total gross sales

 

 

155,879

 

 

19,642

 

 

98,028

 

 

273,549

 

 

126,487

 

 

17,689

 

 

79,762

 

 

223,938

 

Less sales incentives

 

 

(256)

 

 

(2,805)

 

 

(326)

 

 

(3,387)

 

 

(498)

 

 

(2,336)

 

 

(801)

 

 

(3,635)

 

Net sales

 

$

155,623

 

$

16,837

 

$

97,702

 

$

270,162

 

$

125,989

 

$

15,353

 

$

78,961

 

$

220,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended April 30, 2017

 

Six months ended April 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fresh

    

Calavo

    

 

 

    

 

 

    

Fresh

    

Calavo

    

 

 

    

 

 

 

 

 

products

 

Foods

 

RFG

 

Total

 

products

 

Foods

 

RFG

 

Total

 

Third-party sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Avocados

 

$

247,643

 

$

 

$

 

$

247,643

 

$

203,421

 

$

 

$

 

$

203,421

 

Tomatoes

 

 

16,152

 

 

 

 

 

 

16,152

 

 

31,794

 

 

 

 

 

 

31,794

 

Papayas

 

 

4,319

 

 

 

 

 

 

4,319

 

 

4,441

 

 

 

 

 

 

4,441

 

Other fresh products

 

 

101

 

 

 

 

 

 

101

 

 

418

 

 

 

 

 

 

418

 

Food service

 

 

 

 

27,682

 

 

 

 

27,682

 

 

 

 

25,069

 

 

 

 

25,069

 

Retail and club

 

 

 

 

11,449

 

 

196,075

 

 

207,524

 

 

 

 

10,580

 

 

156,545

 

 

167,125

 

Total gross sales

 

 

268,215

 

 

39,131

 

 

196,075

 

 

503,421

 

 

240,074

 

 

35,649

 

 

156,545

 

 

432,268

 

Less sales incentives

 

 

(533)

 

 

(5,506)

 

 

(666)

 

 

(6,705)

 

 

(939)

 

 

(4,808)

 

 

(1,643)

 

 

(7,390)

 

Net sales

 

$

267,682

 

$

33,625

 

$

195,409

 

$

496,716

 

$

239,135

 

$

30,841

 

$

154,902

 

$

424,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fresh

    

Calavo

    

 

 

    

 

 

 

 

products

 

Foods

 

RFG

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  April 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

155,623

 

$

16,837

 

$

97,702

 

$

270,162

 

Cost of sales

 

131,826

 

 

11,237

 

 

90,846

 

 

233,909

 

Gross margin

$

23,797

 

$

5,600

 

$

6,856

 

$

36,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  April 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

125,989

 

$

15,353

 

$

78,961

 

$

220,303

 

Cost of sales

 

111,928

 

 

8,764

 

 

72,804

 

 

193,496

 

Gross margin

$

14,061

 

$

6,589

 

$

6,157

 

$

26,807

 

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For the three months ended April 30, 2017 and 2016, inter-segment sales and cost of sales of $0.2 million and $1.3 million between Fresh products and RFG were eliminated.  For the three months ended April 30, 2017 and 2016, inter-segment sales and cost of sales of $0.6 million between Calavo Foods and RFG were eliminated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fresh

    

Calavo

    

 

 

    

 

 

 

 

products

 

Foods

 

RFG

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended April 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

267,682

 

$

33,625

 

$

195,409

 

$

496,716

 

Cost of sales

 

236,034

 

 

22,933

 

 

179,572

 

 

438,539

 

Gross margin

$

31,648

 

$

10,692

 

$

15,837

 

$

58,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended April 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

239,135

 

$

30,841

 

$

154,902

 

$

424,878

 

Cost of sales

 

214,579

 

 

18,744

 

 

143,750

 

 

377,073

 

Gross margin

$

24,556

 

$

12,097

 

$

11,152

 

$

47,805

 

 

For the six months ended April 31, 2017 and 2016, inter-segment sales and cost of sales of $0.3 million and $1.4 million between Fresh products and RFG were eliminated.  For the six months ended April 30, 2017 and 2016, inter-segment sales and cost of sales of $1.4 million and $1.3 million between Calavo Foods and RFG were eliminated.

 

3.Inventories

 

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

April 30, 

 

October 31, 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Fresh fruit

    

$

23,915

    

$

17,126

 

Packing supplies and ingredients

 

 

8,609

 

 

7,605

 

Finished prepared foods

 

 

6,110

 

 

7,118

 

 

 

$

38,634

 

$

31,849

 

 

Inventories are stated at the lower of cost or net realizable value. We periodically review the value of items in inventory and record any necessary reserves of inventory based on our assessment of market conditions.  No inventory reserve was considered necessary as of April 30, 2017. We recorded an adjustment of $1.1 million to adjust our fresh fruit inventory to the lower of cost or net realizable value as of October 31, 2016.

 

4.Related party transactions

 

Certain members of our Board of Directors market California avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers.  During the three months ended April 30, 2017 and 2016, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $4.7 million and $3.3 million. During the six months ended April 30, 2017 and 2016, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $5.2 million and $3.4 million.  Amounts payable to these Board members were $2.8 million as of April 30, 2017.  We did not have any amounts payable to these Board members as of October 31, 2016.

 

During the three months ended April 30, 2017 and 2016, we received $0.1 million as dividend income from Limoneira Company (Limoneira).  During the six months ended April 30, 2017 and 2016, we received $0.2 million as dividend income from 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, 2017 and 2016. Harold Edwards, who is a member of our Board of

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Directors, is the Chief Executive Officer of Limoneira Company. We have a 12% ownership interest in Limoneira. Additionally, our Chief Executive Officer is a member of the Limoneira Board of Directors.

 

We currently have a member of our Board of Directors who also serves as a partner in the law firm of TroyGould PC, which frequently represents Calavo as legal counsel. During the three months ended April 30, 2017 and 2016, Calavo Growers, Inc. paid fees totaling less than $0.1 million to TroyGould PC. During the six months ended April 30, 2017 and 2016, Calavo Growers, Inc. paid fees totaling approximately $0.1 million to TroyGould PC.

 

In December 2014, Calavo formed a wholly owned subsidiary Calavo Growers De Mexico, S. de R.L. de C.V. (Calavo Sub).  In July 2015, Calavo Sub entered into a Shareholder Agreement with Grupo Belo del Pacifico, S.A. de C.V., (Belo) a Mexican Company owned by Agricola Belher, and formed Agricola Don Memo, S.A. de C.V. (Don Memo). Belo and Calavo Sub have an equal one-half ownership interest in Don Memo in exchange for $2 million each.  Pursuant to a management service agreement, Belo, through its officers and employees, has day-to-day power and authority to manage the operations. Belo is entitled to a management fee, as defined, which is payable annually in July of each year.  Additionally, Calavo Sub is entitled to commission, for the sale of produce in the Mexican National Market, United States, Canada, and any other overseas market.

 

We loaned a total of $4.0 million to Don Memo since its formation. These monies, effectively a bridge loan, were replaced with a new loan to Don Memo from Bank of America, N.A. (BoA) during our first fiscal quarter of 2016 and our bridge loan was repaid from the proceeds of the new loan. Also, in January 2016, Calavo and BoA, entered into a Continuing and Unconditional Guaranty Agreement (the Guaranty). Under the terms of the Guaranty, Calavo unconditionally guarantees and promises to pay BoA any and all Indebtedness, as defined therein, of our unconsolidated subsidiary Don Memo to BoA. Belo has also entered into a similar guarantee with BoA. These guarantees were entered into in connection with the new loan in the amount of $4.5 million from BoA to Don Memo that closed in January 2016.

 

As of April 30, 2017 and October 31, 2016, we have an investment of $3.3 million and $3.7 million, representing Calavo Sub’s 50% ownership in Don Memo, which is included as an investment in unconsolidated entities on our balance sheet.  We make advances to Don Memo for operating purposes, provide additional advances as shipments are made during the season, and return the proceeds from tomato sales under our marketing program to Don Memo, net of our commission and aforementioned advances. As of April 30, 2017 and October 31, 2016, we had outstanding advances of $1.6 million and $0.9 million to Don Memo. During the three months ended April 30, 2016, we recorded $0.2 million of expenses to Don Memo pursuant to our consignment agreement. During the six months ended April 30, 2017 and 2016, we recorded $0.7 million and $0.2 million of expenses to Don Memo pursuant to our consignment agreement.

 

We had grower advances due from Belher of $4.4 million as of April 30, 2017 and October 31, 2016, which are netted against the grower payable.  In addition, we had infrastructure advances due from Belher of $0.8 million as of April 30, 2017 and October 31, 2016.  Of these infrastructure advances $0.2 million was recorded as receivable in prepaid and other current assets.  The remaining $0.6 million of these infrastructure advances are recorded in other assets. During the three months ended April 30, 2017 and 2016, we recorded $9.4 million and $13.4 million of expenses to Belher pursuant to our consignment agreement. During the six months ended April 30, 2017 and 2016, we recorded $13.1 million and $25.5 million of expenses to Belher pursuant to our consignment agreement.

 

In August 2015, we entered into Shareholder’s Agreement with various partners and created Avocados de Jalisco, S.A.P.I. de C.V. (“Avocados de Jalisco”).  Avocados de Jalisco is a Mexican corporation created to engage in procuring, packing and selling avocados.  This entity is approximately 80% owned by Calavo and is consolidated in our financial statements.  Avocados de Jalisco has built a packinghouse located in Jalisco, Mexico and such packinghouse is expected to begin operations at the start of Jalisco’s next avocado crop in the third quarter of fiscal 2017. As of April 30, 2017 and October 31, 2016, we have made preseason advances of approximately $0.2 million to various partners of Avocados de Jalisco.

 

We have an approximate 46% ownership interest in FreshRealm, LLC (FreshRealm).  An officer and three members of our board of directors have made investments into FreshRealm.  In addition, as of April 30, 2017 and October 31, 2016, we have a loan to FreshRealm members of approximately $0.3 million, which is due in May of 2018.  In February 2017, we loaned $0.8 million to FreshRealm.  In addition, two other FreshRealm members have loaned approximately

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$0.8 million to FreshRealm.  In total, this $1.5 million is considered a bridge loan, and was repaid in April 2017. In April 2017, in another round of financing, we committed to invest an additional $8.3 million into FreshRealm if and when certain terms and conditions are met. If the certain conditions are met and we invest up to our commitment level of $8.3 million, our ownership percentage in Freshrealm is still expected to remain at approximately 46%. In April 2017, we invested $3.0 million of the $8.3 million committed in FreshRealm. 

The  previous owners and current managers of RFG have a majority ownership of certain entities that provide various services to RFG, specifically LIG Partners, LLC and THNC, LLC.  RFG’s California operating facility leases a building from LIG Partners, LLC (LIG) pursuant to an operating lease.  RFG’s Texas operating facility leases a building from THNC, LLC (THNC) pursuant to an operating lease.  See the following tables for the related party activity for the three months ended April 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

Three months ended  April 30,

 

(in thousands)

    

2017

    

2016

 

Rent paid to LIG

 

$

135

 

$

131

 

Rent paid to THNC, LLC

 

$

131

 

$

76

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended April 30,

 

(in thousands)

    

2017

    

2016

 

Rent paid to LIG

 

$

269

 

$

262

 

Rent paid to THNC, LLC

 

$

261

 

$

152

 

 

 

 

5.Other assets

 

Other assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

April 30, 

    

October 31, 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Intangibles, net

 

$

2,786

 

$

3,365

 

Mexican IVA (i.e. value-added) taxes receivable

 

 

16,504

 

 

6,962

 

Grower advances

 

 

 —

 

 

49

 

Infrastructure advance to Agricola Belher

 

 

600

 

 

600

 

Loan to FreshRealm members

 

 

309

 

 

318

 

Notes receivable from San Rafael

 

 

712

 

 

928

 

Other

 

 

1,183

 

 

1,027

 

 

 

$

22,094

 

$

13,249

 

 

Intangible assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 2017

 

October 31, 2016

 

 

    

Weighted-

    

Gross

    

 

 

    

Net

    

Gross

    

 

 

    

Net

 

 

 

Average

 

Carrying

 

Accum.

 

Book

 

Carrying

 

Accum.

 

Book

 

 

 

Useful Life

 

Value

 

Amortization

 

Value

 

Value

 

Amortization

 

Value

 

Customer list/relationships

 

8.0 years

 

$

7,640

 

$

(5,720)

 

$

1,920

 

$

7,640

 

$

(5,241)

 

$

2,399

 

Trade names

 

8.2 years

 

 

2,760

 

 

(2,455)

 

 

305

 

 

2,760

 

 

(2,380)

 

 

380

 

Trade secrets/recipes

 

9.3 years

 

 

630

 

 

(344)

 

 

286

 

 

630

 

 

(319)

 

 

311

 

Brand name intangibles

 

indefinite

 

 

275

 

 

 

 

275

 

 

275

 

 

 

 

275

 

Non-competition agreements

 

5.0 years

 

 

267

 

 

(267)

 

 

 —

 

 

267

 

 

(267)

 

 

 —

 

Intangibles, net

 

 

 

$

11,572

 

$

(8,786)

 

$

2,786

 

$

11,572

 

$

(8,207)

 

$

3,365

 

 

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We anticipate recording amortization expense of approximately $0.6 million for the remainder of fiscal 2017, $1.1 million for fiscal year 2018, $0.7 million for fiscal year 2019, $0.1 million for fiscal year 2020, and $0.1 million for each year thereafter, through fiscal year 2023.

 

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

 

6.Stock-Based Compensation

 

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

 

On January 4, 2017, 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 $62.65.  On January 3, 2018, as long as the directors are still serving on the board, these shares lose their restriction and become non-forfeitable and transferable.  These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense for these grants was $0.3 million for the three months ended April 30, 2017.  The total recognized stock-based compensation expense for these grants was $0.4 million for the six months ended April 30, 2017. 

 

On December 19, 2016, our executive officers were granted a total of 70,327 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 $56.20.  These shares vest in one-third increments, on an annual basis, beginning December 19, 2017. These shares were granted pursuant to our 2011 Plan. The total recognized stock-based compensation expense for these grants was $0.3 million for the three months ended April 30, 2017.  The total recognized stock-based compensation expense for these grants was $0.4 million for the six months ended April 30, 2017. 

 

On January 6, 2017, our Chief Operating Officer resigned from Calavo.  His unvested portion of restricted stock of 12,800 shares issued in December of 2016 and January of 2016 was forfeited. On January 25, 2017, as part of his resignation he was granted 12,800 shares of unrestricted stock, which immediately vested.  The closing price of our stock on such date was $58.05. We recorded for this grant $0.7 million of stock-based compensation expense in our fiscal first quarter of 2017.

 

On February 2, 2017, our Vice President of Foods the Division retired from Calavo for medical reasons.  In January 2017, the board of directors agreed that his unvested portion of restricted stock of 13,040 shares shall be vested due to the medical reasons provision in the restricted stock agreements. As a result, we recorded $0.5 million of stock-based compensation expense in our fiscal first quarter of 2017.

 

In January 2017, our Board of Directors approved the issuance of options to acquire a total of 10,000 shares of our common stock to one member of our Board of Directors.  Such grant vests in equal increments over a five-year period and has an exercise price of $56.65 per share.  Vested options have an exercise period of five years from the vesting date.  The market price of our common stock at the grant date was $56.65.  The estimated fair market value of such option grant was approximately $0.2 million.  The total compensation cost not yet recognized as of April 30, 2017 was approximately $0.2 million, which will be recognized over the remaining service period of 60 months.

 

The value of each option award is estimated using a lattice-based option valuation model.  We primarily consider the following assumptions when using these models:  (1) expected volatility, (2) expected dividends, (3) expected life and (4) risk-free interest rate.  Such models also consider the intrinsic value in the estimation of fair value of the option award. 

Prior to November 1, 2016, stock-based compensation expense was recorded net of estimated forfeitures our consolidated statements of income and, accordingly, was recorded for only those stock-based awards that the we expected to vest. We estimated the forfeiture rate based on historical forfeitures of equity awards and adjusted the rate to

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reflect changes in facts and circumstances, if any. We revised our estimated forfeiture rate if actual forfeitures differed from its initial estimates.

Effective as of November 1, 2016, we adopted a change in accounting policy in accordance with ASU 2016-09, “Compensation—Stock Compensation (Topic 718)” to account for forfeitures as they occur. The change was applied on a modified retrospective basis, and no prior periods were restated as a result of this change in accounting policy.

We measure the fair value of our stock option awards on the date of grant.  The following assumptions were used in the estimated grant date fair value calculations for stock options issued in first quarter of 2017:

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.84%

 

Expected volatility

 

42.09%

 

Dividend yield

 

1.59%

 

Expected life (years)

 

5.0

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

Weighted-Average

    

Aggregate

 

 

    

Number of Shares

    

Grant Price

    

Intrinsic Value

 

Outstanding at October 31, 2016

 

84

 

$

44.76

 

 

 

 

Vested

 

(69)

 

$

52.23

 

 

 

 

Forfeited

 

(13)

 

$

53.66

 

 

 

 

Granted

 

103

 

$

57.62

 

 

 

 

Outstanding at April 30, 2017

 

105

 

$

54.63

 

$

6,952

 

 

The total recognized stock-based compensation expense for restricted stock was $0.8 million and $0.6 million for the three months ended April 30, 2017 and 2016.  The total recognized stock-based compensation expense for restricted stock was $2.7 million and $1.0 million for the six months ended April 30, 2017 and 2016. 

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

    

Aggregate

 

 

 

Number of Shares

 

Exercise Price

 

Intrinsic Value

 

Outstanding at October 31, 2016

 

 8

 

$

18.05

 

 

 

 

Exercised

 

(1)

 

$

14.58

 

 

 

 

Outstanding at April 30, 2017

 

 7

 

$

18.54

 

$

462

 

Exercisable at April 30, 2017

 

 7

 

$

18.54

 

$

462

 

 

At April 30, 2017, outstanding and exercisable stock options had a weighted-average remaining contractual term of 2.1 years.  The total recognized and unrecognized stock-based compensation expense was insignificant for the three and six months ended April 30, 2017. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

    

Aggregate

 

 

 

 

 

Exercise

 

Intrinsic

 

 

 

Number of Shares

 

Price

 

Value

 

Outstanding at October 31, 2016

 

11

 

$

23.33

 

 

 

 

Granted

 

10

 

$

56.65

 

 

 

 

Exercised

 

(1)

 

 

21.80

 

 

 

 

Outstanding at April 30, 2017

 

20

 

$

40.07

 

$

518

 

Exercisable at April 30, 2017

 

 8

 

$

23.48

 

$

340

 

 

At April 30, 2017, outstanding and exercisable stock options had a weighted-average remaining contractual term of 5.7 years.  The total recognized and unrecognized stock-based compensation expense was insignificant for the three months and six months ended April 30, 2017. 

 

7.Other events

 

Dividend payment

 

On December 8, 2016, we paid a $0.90 per share dividend in the aggregate amount of $15.7 million to shareholders of record on November 17, 2016.

 

Temecula Facility

   In April 2017, our agreement with Southern California Investors, a California corporation, pursuant to which we would sell certain real property located at 28410 Vincent Moraga Drive, Temecula, California (collectively, the “Temecula Property”), was terminated by mutual agreement.

Litigation

 

We are currently a named defendant in two class action lawsuits filed in Superior state courts in California alleging violations of California wage-and-hour laws, failure to pay overtime, failure to pay for missed meal and rest periods, failure to provide accurate itemized wage statements, failure to pay all wages due at the time of termination or resignation, as well as statutory penalties for violation of the California Labor Code and Minimum Wage Order-2014.  We are still assessing the claims and assertions made by the plaintiffs.  We intend to aggressively challenge the merits of each lawsuit.  At this time, we are not able to predict either the outcome of these lawsuits or estimate a potential range of loss with respect to said lawsuits.

 

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

Mexico tax audits

 

    We conduct business internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions.  Accordingly, in the normal course of business, we are subject to examination by taxing authorities, primarily in Mexico and the United States.  During our third quarter of fiscal 2016, our wholly-owned subsidiary, Calavo de Mexico (“CDM”), received a written communication from the Ministry of Finance and Administration of the government of the State of Michoacan, Mexico (“MFM”) containing preliminary observations related to a fiscal 2011 tax audit of such subsidiary.  MFM’s preliminary observations outline certain proposed adjustments primarily related to intercompany funding, deductions for services from certain vendors/suppliers and Value Added Tax (“VAT”).  During our fourth fiscal quarter of 2016, we provided a written rebuttal to MFM’s preliminary observations  and requested the adoption of a conclusive agreement before the PRODECON (Local Tax Ombudsman) so that a full discussion of the case between us, the MFM and the PRODECON, as appropriate, can lead to

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a reconsideration of the MFM findings. We expect that several formal meetings between us, the MFM and the PRODECON will be required before the MFM will reach a conclusion.  The first such meeting occurred during our second fiscal quarter.  We expect another meeting to occur in the coming months. Note that during the meeting and discussion process, the fiscal year 2011 final assessment (previously expected no later February 2017) has been suspended.

 

    Additionally, we also received notice from Mexico's Federal Tax Administration Service, Servicio de Administracion Tributaria (SAT), that our wholly-owned Mexican subsidiary, Calavo de Mexico, is currently under examination related to fiscal year 2013.  In January 2017 we received preliminary observations from SAT outlining certain proposed adjustments primarily related to intercompany funding deductions for services from certain vendors/suppliers and VAT. We provided a written rebuttal to these preliminary observation during our second fiscal quarter of 2017 which the SAT is in process of analyzing.  During the coming months, we will evaluate our option to request the adoption of a conclusive agreement before the PRODECON which if we do so, will suspend the pending final assessment for fiscal year 2013.

 

    We believe that the ultimate resolution of these matters is unlikely to have a material effect on our consolidated financial position.

 

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 April 30, 2017 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)

 

$

35,747

 

 

-

 

 

-

 

$

35,747

 

Total assets at fair value

 

$

35,747

 

 

-

 

 

-

 

$

35,747

 


(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, 2017 and October 31, 2016 equaled $20.68 per share and $19.69 per share.  Unrealized gains and losses are recognized through other comprehensive income. Unrealized investment holding gains arising during the three months ended April 30, 2017 and 2016 was $6.4 million and $9.2 million. Unrealized investment holding gains arising during the six months ended April 30, 2017 and 2016 was $1.7 million and $3.5 million.

 

 

 

 

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9.Noncontrolling interest

 

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

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

Three months

 

Three months

 

 

 

 

ended

 

 

ended

 

Salsa Lisa noncontrolling interest

 

April 30, 2017

 

April 30, 2016

 

 

 

 

 

 

 

 

Noncontrolling interest, beginning

 

$

771

 

$

285

 

Purchase of noncontrolling interest of Salsa Lisa

 

 

(771)

 

 

 —

 

Noncontrolling interest, ending

 

$

 —

 

$

285

 

 

 

 

 

 

 

 

 

 

 

    

Six months

    

Six months

 

 

 

ended

 

ended

 

Salsa Lisa noncontrolling interest

    

April 30, 2017

    

April 30, 2016

 

 

 

 

 

 

 

 

Noncontrolling interest, beginning

 

$

771

 

$

285

 

Purchase of noncontrolling interest of Salsa Lisa

 

 

(771)

 

 

 —

 

Noncontrolling interest, ending

 

$

 —

 

$

285

 

 

 

 

 

 

 

 

 

 

 

    

Three months

    

Three months

 

 

 

 

ended

 

 

ended

 

Avocados de Jalisco noncontrolling interest

    

April 30, 2017

    

April 30, 2016

 

 

 

 

 

 

 

 

 

Noncontrolling interest, beginning

 

$

934

 

$

1,038

 

Net income (loss) attributable to noncontrolling interest of Avocados de Jalisco

 

 

(11)

 

 

(13)

 

Noncontrolling interest, ending

 

$

923

 

$

1,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Six months

    

Six months

 

 

 

ended

 

ended

 

Avocados de Jalisco noncontrolling interest

    

April 30, 2017

    

April 30, 2016

 

 

 

 

 

 

 

 

 

Noncontrolling interest, beginning

 

$

962

 

$

1,011

 

Net loss attributable to noncontrolling interest of Avocados de Jalisco

 

 

(39)

 

 

14

 

Noncontrolling interest, ending

 

$

923

 

$

1,025

 

 

 

 

 

 

 

 

10.Earnings per share

 

Basic and diluted net income per share is calculated as follows (data in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

Three months ended April 30,

 

    

2017

    

2016

Numerator:

 

 

 

 

 

 

Net Income attributable to Calavo Growers, Inc.

 

$

12,945

 

$

9,689

Denominator:

 

 

 

 

 

 

Weighted average shares - Basic

 

 

17,426

 

 

17,348

Effect on dilutive securities – Restricted stock/options

 

 

113

 

 

97

Weighted average shares - Diluted

 

 

17,539

 

 

17,445

Net income per share attributable to Calavo Growers, Inc:

 

 

 

 

 

 

Basic

 

$

0.74

 

$

0.56

Diluted

 

$

0.74

 

$

0.56

 

 

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Six months ended April 30,

 

    

2017

    

2016

Numerator:

 

 

 

 

 

 

Net Income attributable to Calavo Growers, Inc.

 

$

18,194

 

$

16,038

Denominator:

 

 

 

 

 

 

Weighted average shares - Basic

 

 

17,402

 

 

17,335

Effect on dilutive securities – Restricted stock/options

 

 

84

 

 

80

Weighted average shares - Diluted

 

 

17,486

 

 

17,415

Net income per share attributable to Calavo Growers, Inc:

 

 

 

 

 

 

Basic

 

$

1.05

 

$

0.93

Diluted

 

$

1.04

 

$

0.92

 

 

11.Mexican IVA taxes receivable

 

Included in prepaids & other current assets and other assets are tax receivables due from the Mexican government for value-added taxes (IVA) paid in advance.  CDM is charged IVA by vendors on certain expenditures in Mexico, which, insofar as they relate to the exportation of goods, translate into IVA amounts receivable from the Mexican government.

 

As of April 30, 2017 and October 31, 2016, CDM IVA receivables totaled $16.5 million and $14.2 million.  Historically, CDM received IVA refund payments from the Mexican tax authorities on a timely basis.  Beginning in fiscal 2014 and continuing into fiscal 2017, however, the tax authorities began carrying out more detailed reviews of our refund requests and our supporting documentation.  Additionally, they are also questioning the refunds requested attributable to IVA paid to certain suppliers that allegedly did not fulfill their own tax obligations.  We believe these factors and others have contributed to delays in the processing of IVA claims by the Mexican tax authorities.  Currently, we are in the process of collecting such balances through regular administrative processes, but certain amounts may ultimately need to be recovered via legal means.  We believe that our operations in Mexico are properly documented and that the Mexican tax authorities will ultimately authorize the refund of the corresponding IVA amounts.  We will continue to monitor the collection of these receivables with our outside consultants.

 

During the first quarter of fiscal 2017, tax authorities informed us that their internal opinion, based on the information provided by local SAT office in Uruapan, considers that CDM is not properly documented relative to its declared tax structure and therefore CDM cannot claim the refundable VAT balance.  CDM has strong arguments and supporting documentation to sustain its declared tax structure for VAT and income tax purposes.  CDM decided to start an administrative appeal for the VAT related to the request of the months of July, August and September of 2015 in order to assert its argument that CDM is properly documented and to therefore change the SAT’s internal assessment.  CDM expects to have a resolution to this matter in the third quarter of fiscal 2017. Based on the information mentioned above, in the first quarter of fiscal 2017, we reclassified the total CDM IVA balance from prepaid and other current assets to other assets. As of October 31, 2016, $7.3 million of CDM IVA were recorded in prepaids and other current assets.  As of April 30, 2017 and October 31, 2016, $16.5 million and $7.0 million of CDM IVA receivables were recorded in other assets.

 

12.Salsa Lisa

 

In March 2017, pursuant to the Amended and Restated Limited Liability Company Agreement dated February 8, 2010 entered into by Calavo Growers, Inc., Calavo Salsa Lisa LLC, Lisa’s Salsa Company, Elizabeth Nicholson and Eric Nicholson, we purchased the 35 percent ownership of Calavo Salsa Lisa not held by us for $1.0 million. 

 

 

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

 

This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the fiscal year ended October 31, 2016 of Calavo Growers, Inc. (we, Calavo, or the Company). 

 

Recent Developments

 

Dividend payment

 

On December 8, 2016, we paid a $0.90 per share dividend in the aggregate amount of $15.7 million to shareholders of record on November 17, 2016.

 

Litigation

 

We are currently a named defendant in two class action lawsuits filed in Superior state courts in California alleging violations of California wage-and-hour laws, failure to pay overtime, failure to pay for missed meal and rest periods, failure to provide accurate itemized wage statements, failure to pay all wages due at the time of termination or resignation, as well as statutory penalties for violation of the California Labor Code and Minimum Wage Order-2014.  We are still assessing the claims and assertions made by the plaintiffs.  We intend to aggressively challenge the merits of each lawsuit. At this time, we are not able to predict either the outcome of these lawsuits or estimate a potential range of loss with respect to said lawsuits.

 

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.

 

Net Sales

 

The following table summarizes our net sales by business segment for each of the three months and six months ended April 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  April 30, 

 

Six months ended April 30, 

 

 

(in thousands)

 

2017

 

Change

 

2016

 

2017

 

Change

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

    

 

    

    

    

    

 

    

    

 

    

    

    

    

 

    

    

 

Fresh products

 

$

155,623

 

23.5

%  

$

125,989

 

$

267,682

 

11.9

%  

$

239,135

 

 

Calavo Foods

 

 

16,837

 

9.7

%  

 

15,353

 

 

33,625

 

9.0

%  

 

30,841

 

 

RFG

 

 

97,702

 

23.7

%  

 

78,961

 

 

195,409

 

26.2

%  

 

154,902

 

 

Total net sales

 

$

270,162

 

22.6

%  

$

220,303

 

$

496,716

 

16.9

%  

$

424,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a percentage of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fresh products

 

 

57.6

%  

 

 

 

57.2

%  

 

53.8

%  

 

 

 

56.2

%

 

Calavo Foods

 

 

6.2

%  

 

 

 

7.0

%  

 

6.8

%  

 

 

 

7.3

%

 

RFG

 

 

36.2

%  

 

 

 

35.8

%  

 

39.4

%  

 

 

 

36.5

%

 

 

 

 

100.0

%  

 

 

 

100.0

%  

 

100.0

%  

 

 

 

100.0

%

 

 

Summary

 

Net sales for the three months ended April 30, 2017, compared to the corresponding period in fiscal 2016, increased by $49.9 million, or 22.6%.  The increase in sales, when compared to the same corresponding prior year period, are

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related to increases in sales from all segments.  Net sales for the six months ended April 30, 2017, compared to fiscal 2016, increased by $71.8 million, or 16.9%.  The increase in sales, when compared to the same corresponding prior year period, are related to increases in sales from all segments. 

 

For the quarter ended April 30, 2017, our largest percentage increases in sales were in our RFG and Fresh products segments, followed by our Calavo Foods segment, as shown above. The increase in RFG sales was due primarily to increased sales from fresh prepared food, fresh-cut fruit and vegetable products. Our increase in Fresh products sales during the second quarter of fiscal 2017, was due primarily to increased sales of Mexican avocados, which were partially offset by decreased sales of tomatoes and California sourced avocados. The increase in Calavo Foods sales was due primarily to increased sales of our guacamole and salsa products. See discussion below for further details. 

 

For the six months ended April 30, 2017, our largest percentage increase in sales was in our RFG segment, followed by our Fresh products and Calavo Foods segments, as shown above.  The increase in RFG sales was due primarily to increased sales from fresh prepared food, fresh-cut fruit and vegetable products. Our increase in Fresh products sales was due primarily to increased sales of Mexican and California sourced avocados, which were partially offset by decreased sales of tomatoes. The increase in Calavo Foods sales was due primarily to increased sales of our salsa and guacamole products. See discussion below for further details.

 

All three segments of our business are subject to seasonal trends which can impact the volume and/or quality of fruit sourced in any particular quarter.

 

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 2017 vs. Second Quarter 2016

 

Net sales delivered by the Fresh products business increased by approximately $29.6 million, or 23.5%, for the second quarter of fiscal 2017, when compared to the same period for fiscal 2016.  As discussed above, this increase in Fresh product sales during the second quarter of fiscal 2017 was primarily related to increased sales of Mexican avocados, partially offset by decreased sales of tomatoes and California sourced avocados.

 

Sales of Mexican sourced avocados increased $35.0 million, or 40.9%, for the second quarter of 2017, when compared to the same prior year period.  This increase was primarily due to an approximately 84.5% increase in the average sales price per carton, which was largely related to the current market conditions, in which consumer demand continued to exceed available industry supply. Partially offsetting this higher sales price was a decrease in the volume of Mexican sourced avocados sold in the quarter.

 

Sales of tomatoes decreased to $11.0 million for the second quarter of fiscal 2017, compared to $15.8 million for the same period for fiscal 2016.  The decrease in sales for tomatoes is primarily due to a decrease in the sales price per carton, as well as a decrease in cartons sold.  The sales price per carton decreased by approximately 20.6%, primarily due to a change in weather patterns which resulted in a wider availability of tomatoes in the market.  In addition, we had a decrease in cartons sold in the quarter.

 

Sales of California sourced avocados decreased $0.1 million, less than 1%, for the second quarter of 2017, when compared to the same prior year period.  The decrease in California sourced avocados was primarily due to a decrease in the volume of California sourced avocados sold in the quarter, offset by an approximately 104.0% increase in the average sales price per carton. 

 

Six Months Ended 2017 vs. Six Months Ended 2016

 

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Net sales delivered by the Fresh products business increased by approximately $28.5 million, or 11.9%, for the six months ended April 30, 2017, when compared to the same period for fiscal 2016.  As discussed above, this increase in Fresh product sales during the six months ended April 30, 2017, was primarily related to increased sales of Mexican and California sourced avocados, partially offset by a decrease in sales from tomatoes.

 

Sales of Mexican sourced avocados increased $44.2 million, or 24.6%, for the six months ended April 30, 2017, when compared to the same prior year period.  The increase in Mexican sourced avocados was primarily due to an increase in the average sales price per carton, which increased approximately 60.5% from the same prior year period. The increase in the average sales price per carton is largely related to current market conditions, in which consumer demand continued to exceed available industry supply.  Partially offsetting this increase is a decrease in pounds sold of Mexican sourced avocados.

 

Sales of California sourced avocados increased $0.4 million, or 1.7%, for the six months ended April 30, 2017, when compared to the same prior year period.  The increase in California sourced avocados was primarily due to an increase in the average sales price per carton, which increased approximately 99.7% from the same prior year period. The increase in the average sales price per carton is primarily related to current market conditions, in which consumer demand continued to exceed available industry supply. Partially offsetting the increase, was a decrease in pounds sold of California avocados. 

 

Partially offsetting the increases noted above was a decrease in sales of  tomatoes, which decreased to $16.2 million for the six months ended April 30, 2017, compared to $31.8 million for the same period for fiscal 2016.  The decrease in sales for tomatoes is primarily due to a decrease in the sales price per carton, as well as a decrease in cartons sold.  The sales price per carton decreased by approximately 36.5%, primarily due to a change in weather patterns which resulted in a wider availability of tomatoes in the market.  In addition, we had a decrease in cartons sold during the period.

 

Calavo Foods

 

Second Quarter 2017 vs. Second Quarter 2016

 

Sales for Calavo Foods for the quarter ended April 30, 2017, when compared to the same period for fiscal 2016, increased $1.5 million, or 9.7%.  This increase is primarily due to an approximate $1.4 million, or 9.5%, increase in sales of guacamole products in the second quarter of fiscal year 2017, when compared to the same prior year period.  This increase in our guacamole products is primarily due to a 13.0% increase in pounds sold.  In addition, sales of salsa increased by approximately $0.1 million, or 12.6%, primarily due to an increase in pounds sold.

 

Six Months Ended 2017 vs. Six Months Ended 2016

 

Sales for Calavo Foods for the six months ended April 30, 2017, when compared to the same period for fiscal 2016, increased $2.8 million, or 9.0%.  This increase is primarily due to an approximate $2.6 million, or 9.0%, increase in sales of guacamole products, in the six months ended April 30,  2017, when compared to the same prior year period. This increase in our guacamole products is primarily due to a 11.7% increase in pounds sold.  In addition in the six months ended April 30, 2017, sales of salsa increased by approximately $0.2 million, or 9.3%, primarily due to an increase in pounds sold.

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RFG

 

Second Quarter 2017 vs. Second Quarter 2016

 

Sales for RFG for the quarter ended April 30, 2017, when compared to the same period for fiscal 2016, increased $18.7 million, or 23.7%.  The overall increase in sales is primarily due to an increase in sales volume, which we believe results from an increase in demand for the variety of fresh, convenient products that we offer, as well as our ability to expand retail relationships by providing high-quality, fresh foods solutions from our growing national production footprint. In addition, approximately $0.6 million of the increase in sales was due to a change in the presentation of broker commission expenses which was moved to selling, general and administrative expense during the first quarter of fiscal 2017, rather than shown as a reduction in net sales as was done during the second quarter of fiscal 2016.

 

Six Months Ended 2017 vs. Six Months Ended 2016

 

Sales for RFG for the six months ended April 30, 2017, when compared to the same period for fiscal 2016, increased $40.5 million, or 26.2%.  The overall increase in sales is primarily due to an increase in sales volume, which we believe results from an increase in demand for the variety of fresh, convenient products that we offer, as well as our ability to expand retail relationships by providing high-quality, fresh foods solutions from our growing national production footprint. In addition, approximately $1.4 million of the increase in sales was due to a change in the presentation of broker commission expenses which was moved to selling, general and administrative expense during the first quarter of fiscal 2017, rather than shown as a reduction in net sales as was done during the six months ended for fiscal 2016.

 

Gross Margin

 

The following table summarizes our gross margin and gross margin percentages by business segment for the three months and six months ended April 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  April 30, 

 

Six months ended April 30, 

 

 

(in thousands)

 

2017

 

Change

 

2016

 

2017

 

Change

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin:

    

 

    

    

    

    

 

    

    

 

    

    

    

    

 

    

 

 

Fresh products

 

$

23,797

 

69.2

%  

$

14,061

 

$

31,648

 

28.9

%  

$

24,556

 

 

Calavo Foods

 

 

5,600

 

(15.0)

%  

 

6,589

 

 

10,692

 

(11.6)

%  

 

12,097

 

 

RFG

 

 

6,856

 

11.4

%  

 

6,157

 

 

15,837

 

42.0

%  

 

11,152

 

 

Total gross margin

 

$

36,253

 

35.2

%  

$

26,807

 

$

58,177

 

21.7

%  

$

47,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin percentages:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fresh products

 

 

15.3

%  

 

 

 

11.2

%  

 

11.8

%  

 

 

 

10.3

%

 

Calavo Foods

 

 

33.3

%  

 

 

 

42.9

%  

 

31.8

%  

 

 

 

39.2

%

 

RFG

 

 

7.0

%  

 

 

 

7.8

%  

 

8.1

%  

 

 

 

7.2

%

 

Consolidated

 

 

13.4

%  

 

 

 

12.2

%  

 

11.7

%  

 

 

 

11.3

%

 

 

Summary

 

Our cost of goods sold consists predominantly of fruit and other raw material 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 margin increased by approximately $9.4 million, or 35.2%, for the second quarter of fiscal 2017, when compared to the same period for fiscal 2016. Gross margins increased by approximately $10.4 million, or 21.7%, for the first six months of fiscal 2017 when compared to the same period for fiscal 2016.  These increases in our gross margin, when compared to the same prior year periods, are related to increases in gross margin across the Fresh products and RFG segments. Partially offsetting these increases is a decrease in gross margin for our Calavo Foods segment.

 

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Fresh products

 

During our three and six months ended April 30, 2017, 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 and California sourced avocados, partially offset by a decrease in margin for tomatoes. For the second quarter of 2017, the gross margin percentage for Mexican sourced avocados increased to 17.2% compared to 12.9% in the same prior year period.  For the six months ended April 30, 2017, the gross margin percentage for Mexican sourced avocados increased to 13.0% compared to 11.5% in the same prior year period. For the second quarter of 2017, the gross margin percentage for California sourced avocados was 8.3% compared to 5.1% in the same prior year period.  For the six months ended April 30, 2017, the gross margin percentage for California sourced avocados increased to 5.3% compared to 0.6% in the same prior year period. The profit improvement in our fiscal second quarter, was primarily the result of management’s focus and execution on continuous improvement across the operation which helped to complement the current market conditions, in which consumer demand continued to exceed available industry supply.  In addition, U.S. Dollar to Mexican Peso exchange rate was stronger in fiscal 2017, when compared to the same period in fiscal 2016.  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.  . 

 

The gross margin and gross margin percentage for consignment sales, such as tomatoes, are dependent on the average selling prices and volume of fruit we handle, and the competitiveness of the returns that we provide to third-party growers/packers.The gross margin we earn is generally based on a commission agreed to with each party, which usually is a percentage of the overall selling price. In the second quarter of fiscal year 2017, we had a decrease in gross margin from our consigned tomato sales of approximately $0.6 million, when compared to the same prior year period. For the six months ended April 30, 2017 we had a decrease in gross margin from our consigned tomato sales of approximately $2.4 million, when compared to the same prior year period. The decrease in gross margin is primarily due to a decrease in overall sales for tomatoes, resulting from a 36.5% decrease in the sales price per carton, which in turn, led us to bring fewer cartons to market during the fiscal 2017.

 

Calavo Foods

 

The gross margin percentage for the Calavo Foods segment decreased during our three and six months ended April 30, 2017 when compared to the same prior year periods, primarily due to an increase in fruit costs for guacamole products. Partially offsetting the decrease in gross margins for guacamole products was an increase in gross margin for salsa products, approximately $0.1 million for second quarter of fiscal 2017 and $0.3 million for six months ended April 30, 2017. The U.S. Dollar to Mexican Peso exchange rate was stronger in fiscal 2017, when compared to the same period in fiscal 2016. Note that 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

 

For the quarter ended April 30, 2017, RFG’s gross margin increased $0.7 million, or 11.4%, when compared to the same period for fiscal 2016.  For six months ended April 30, 2017, RFG’s gross margins increased $4.7 million, or 42.0%, when compared to the same prior year period. Gross margin in the fiscal second quarter was impacted primarily by costs associated with growth initiatives, specifically costs incurred in ramping up activity at new or recently refurbished RFG plants. The increase in gross margin in the second quarter and first six months of fiscal 2017, was enhanced, in part, by a change in the presentation of broker commission expenses, totaling $0.6 million in the second quarter and $1.4 million in the six months ended of fiscal 2017, which was moved to selling, general and administrative expense, rather than shown as a reduction in net sales, as was done in prior periods. Without the broker commission impact, gross margins would have increased $0.1 million or 1.1% for quarter ended April 30, 2017.  Without the broker commission impact, gross margins would have increased $3.3 million or 29.6% for six months ended April 30, 2017.

 

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Selling, General and Administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  April 30, 

 

Six months ended April 30, 

 

 

(in thousands)

 

2017

 

Change

 

2016

 

2017

 

Change

 

2016

 

 

 

 

(Dollars in thousands)

(Dollars in thousands)

 

Selling, general and administrative

    

$

15,426

    

32.3

%  

$

11,658

    

$

29,252

    

29.6

%  

$

22,579

    

 

Percentage of net sales

 

 

5.7

%  

 

 

 

5.3

%  

 

5.9

%  

 

 

 

5.3

%

 

 

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 $3.8 million, or 32.3%, for the three months ended April 30, 2017, when compared to the same period for fiscal 2016.  Part of this increase was related to a change in the presentation of broker commission (approximately $0.9 million) to include such costs in selling, general and administrative expenses, which had historically been presented as a reduction in net sales. In addition to this item, the increase was related to an increase in bad debt (approximately $1.4 million), an increase in accrued management bonuses (approximately $0.6 million), and an increase in salaries (approximately $0.5 million, due in part to higher headcount).

 

Selling, general and administrative expenses increased $6.7 million, or 29.6%, for the six months ended April 30, 2017, when compared to the same period for fiscal 2016.  This increase was partly related to two factors that do not reflect changes in the overall cost structure of the Company, specifically a change in presentation of broker commission (approximately $1.4 million) to include such costs in selling, general and administrative expenses, which had historically been presented as a reduction in net sales, and non-recurring expenses related to the resignation and retirement of two corporate officers (approximately $1.2 million).  In addition to these items, the increase was related to an increase in bad debt (approximately $1.4 million), an increase in salaries (approximately $1.0 million, due in part to higher headcount) and an increase related to accrued management bonuses (approximately $0.5 million).

 

Provision for Income Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  April 30, 

 

Six months ended April 30, 

 

 

(in thousands)

 

2017

 

Change

 

2016

 

2017

 

Change

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

    

$

7,603

    

36.7

%  

$

5,561

    

$

10,164

    

9.5

%  

$

9,286

    

 

Effective tax rate

 

 

37.0

%  

 

 

 

36.5

%  

 

35.9

%  

 

 

 

36.6

%

 

 

For the second quarter of fiscal 2017, our provision for income taxes was $7.6 million, as compared to $5.6 million in the comparable prior year period. For the six months ended April 30, 2017, our provision for income taxes was $10.2 million, as compared to $9.3 million in the comparable prior year period. We currently expect our annual effective tax rate to be approximately 35.9% during fiscal 2017, less tax benefits related to the Company’s early adoption of the new Accounting Standards Updated (“ASU”) on the accounting for share-based payment transactions the bulk of which were realized in our first fiscal quarter of 2017.

 

Liquidity and Capital Resources

 

Cash provided by operating activities was $23.3 million for the six months ended April 30, 2017, compared to cash provided by operations of $26.3 million for the similar period in fiscal 2016.  Operating cash flows for the six months ended April 30, 2017 reflect our net income of $18.2 million, net increase in non-cash activities (depreciation and amortization, provision for losses on accounts receivable, stock compensation expense, and income from unconsolidated entities) of $9.0 million and a net decrease in the non-cash components of our operating capital of approximately $3.9 million.

 

Our operating capital decreases include an increase in accounts receivable of $26.3 million, an increase in inventory of $6.8 million, an increase in other assets of $1.3 million, an increase in prepaid expenses and other current assets of $0.4 million, partially offset by an increase in payable to growers of $16.5 million, a net increase in accounts payable and accrued expenses of $6.7 million, an increase in income tax payable of $4.7 million and a decrease in advances to suppliers of $2.9 million.

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The increase in our accounts receivable, as of April 30, 2017 when compared to October 31, 2016, primarily reflects higher sales recorded in the month of April 2017, as compared to October 2016.  The increase in inventory is primarily related to an increase in the value of  fresh fruit on hand at April 30, 2017. This was primarily driven by an increase in the per unit value of inventory on hand and the volume of California avocados purchased during our second fiscal quarter of 2017, as compared to October 2016. The increase in other assets is due to an increase in Mexican IVA tax receivable (see Note 11 to our consolidated condensed financial statements). The increase in payable to growers primarily reflects an increase in our California avocado grower liability due to an increase in California avocados sold in the second quarter of fiscal 2017 compared to the fourth quarter of fiscal 2016.  The increase in accounts payable and accrued expenses is primarily related to an increase in our payables related to RFG.  The decrease in income tax receivable and increase in income tax payable primarily reflects the tax impact of our current year’s net income. The decrease in advances to suppliers primarily reflects less pre-season advances made to our tomato growers in April 2017, compared to October 2016.

 

Cash used in investing activities was $38.5 million for the six months ended April 30, 2017, which primarily related to expansion projects for RFG segment (including more than $19 million for purchase of the new Riverside plant which was financed under our existing credit facilities as noted below) and for the Fresh segment, and an investment in FreshRealm of $4.6 million, partially offset by proceeds received from the repayment of the San Rafael note of $0.2 million.

 

Cash provided by financing activities was $11.8 million for the six months ended April 30, 2017, which related principally to receipts on our credit facilities totaling $28.5 million, partially offset by the payment of our $15.7 million dividend and for the purchase of the noncontrolling interest of Salsa Lisa of $1.0 million

 

Our principal sources of liquidity are our existing cash balances, cash generated from operations and amounts available for borrowing under our existing Credit Facility.  Cash and cash equivalents as of April 30, 2017 and October 31, 2016 totaled $10.5 million and $13.8 million. Our working capital at April 30, 2017 was $7.6 million, compared to $25.6 million at October 31, 2016.

 

We believe that cash flows from operations and the available Credit Facility will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements for the next twelve months.  We will continue to evaluate grower recruitment opportunities and expand relationships with retail and/or foodservice customers to fuel growth in each of our business segments.  We have a revolving credit facility with Bank of America as administrative agent and Merrill Lynch, Pierce, Fenner & Smith Inc. as joint lead arranger and sole bookrunner, and Farm Credit West, as joint lead arranger. Under the terms of this agreement, we are advanced funds for both working capital and long-term productive asset purchases.  Total credit available under this  new agreement is $80 million, and will expire in June 2021. Upon notice to Bank of America, we may from time to time, request an increase in the Credit Facility by an amount not exceeding $50 million. For our current and past line of credit agreements the weighted-average interest rate was 2.1% and 1.9% at April 30, 2017 and October 31, 2016.  Under these credit facilities, we had $47.5 million and $19.0 million outstanding as April 30, 2017 and October 31, 2016. 

    This new Credit Facility contains customary affirmative and negative covenants for agreements of this type, including the following financial covenants applicable to the Company and its subsidiaries on a consolidated basis: (a) a quarterly consolidated leverage ratio of not more than 2.50 to 1.00 and (b) a quarterly consolidated fixed charge coverage ratio of not less than 1.15 to 1.00. We were in compliance with all such covenants at Apri1 30, 2017. 

 

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, 2016. For a summary of the contractual commitments at October 31, 2016, see Part II, Item 7, in our 2016 Annual Report on Form 10-K.

 

Impact of Recently Issued Accounting Pronouncements

 

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our financial instruments include cash and cash equivalents, accounts receivable, payable to growers, accounts payable, current and long-term borrowings pursuant to our credit facilities with financial institutions, and long-term, fixed-rate obligations.  All of our financial instruments are entered into during the normal course of operations and have not been acquired for trading purposes.  The table below summarizes interest rate sensitive financial instruments and presents principal cash flows in U.S. dollars, which is our reporting currency, and weighted-average interest rates by expected maturity dates, as of April 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(All amounts in thousands)

 

Expected maturity date April 30,

 

 

    

2018

    

2019

    

2020

    

2021

    

2022

    

Thereafter

    

Total

    

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (1)

 

$

10,468

 

$

 

$

 

$

 

$

 

$

 

$

10,468

 

$

10,468

 

Accounts receivable (1)

 

 

94,970

 

 

 

 

 

 

 

 

 

 

 

 

94,970

 

 

94,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payable to growers (1)

 

$

37,480

 

$

    —

 

$

 

$

 

$

 

$

 

$

37,480

 

$

37,480

 

Accounts payable (1)

 

 

28,346

 

 

 

 

 

 

 

 

 

 

 

 

28,346

 

 

28,346

 

Current borrowings pursuant to credit facilities (1)

 

 

47,500

 

 

    —

 

 

 

 

 

 

 

 

 

 

47,500

 

 

47,500

 

Fixed-rate long-term obligations (2)

 

 

134

 

 

103

 

 

101

 

 

101

 

 

101

 

 

21

 

 

561

 

 

589

 

 


(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 3.5% to 4.3% with a weighted-average interest rate of 4.3%.  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 $16,000.

 

We were not a party to any derivative instruments during the fiscal year.  It is currently our intent not to use derivative instruments for speculative or trading purposes. Additionally, we do not use any hedging or forward contracts to offset market volatility. 

 

Our Mexican affiliates transact business primarily in Mexican pesos.  Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy the domestic cash needs of our Mexican affiliates. We do not currently use derivative instruments to hedge fluctuations in the Mexican peso to U.S. dollar exchange rates.  Management does, however, evaluate this opportunity from time to time. Total foreign currency translation gains for the three months ended April 30, 2017 and 2016, net of losses, was $0.2 million and $0.6 million. Total foreign currency translation gains for the six months ended April 30, 2017, net of losses, was $0.3 million. Total foreign currency translation losses for the six months ended April 30, 2016, net of gains, was $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, 2017 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

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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

 

 

ITEM 1A. RISK FACTORS

 

For a discussion of our risk factors, see Part 1, item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, 2016.  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 2016 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

 

 

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, 2017, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of April 30, 2017 and October 31, 2016; (2) Consolidated Condensed Statements of Income for the three and six months ended April 30, 2017 and 2016; (3) Consolidated Condensed Statements of Comprehensive Income for the three and six months ended April 30, 2017 and 2016; (4) Consolidated Condensed Statements of Cash Flows for the three and six months ended April 30, 2017 and 2016; and (5) Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

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SIGNATURES

 

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

 

 

Calavo Growers, Inc.

 

(Registrant)

 

 

 

 

 

 

Date: June 8, 2017

 

 

 

By

/s/ Lecil E. Cole

 

 

Lecil E. Cole

 

 

Chairman of the Board of Directors, President, and

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: June 8, 2017

 

 

 

By

/s/ B. John Lindeman

 

 

B. John Lindeman

 

 

Chief Financial Officer and Corporate Secretary

 

 

(Principal Financial Officer)

 

 

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INDEX TO EXHIBITS

 

Exhibit

 

 

Number

 

Description

 

 

 

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, 2017, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Condensed Balance Sheets as of April 30, 2017 and October 31, 2016; (2) Consolidated Condensed Statements of Income for the three and six months ended April 30, 2017 and 2016; (3) Consolidated Condensed Statements of Comprehensive Income for the three and six months ended April 30, 2017 and 2016; (4) Consolidated Condensed Statements of Cash Flows for the three and six months ended April 30, 2017 and 2016; and (5) Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

30