UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended April 30, 2012
OR
Commission file number: 000-33385
CALAVO GROWERS, INC.
(Exact name of registrant as specified in its charter)
1141-A Cummings Road
Santa Paula, California 93060
(Address of principal executive offices) (Zip code)
(805) 525-1245
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Registrant’s number of shares of common stock outstanding as of April 30, 2012 was 14,787,433
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo Growers, Inc. and its consolidated subsidiaries (Calavo, the Company, we, us or our) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flows, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of restructuring and integration plans; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Calavo and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic trends and events; the competitive pressures faced by Calavo’s businesses; the development and transition of new products and services (and the enhancement of existing products and services) to meet customer needs; integration and other risks associated with business combinations; the hiring and retention of key employees; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including, but not limited to, the items discussed in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011, 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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INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited):
Consolidated Condensed Balance Sheets – April 30, 2012 and October 31, 2011
Consolidated Condensed Statements of Income – Three Months and Six Months Ended April 30, 2012 and 2011
Consolidated Condensed Statements of Comprehensive Income – Three Months and Six Months Ended April 30, 2012 and 2011
Consolidated Condensed Statements of Cash Flows – Six Months Ended April 30, 2012 and 2011
Notes to Consolidated Condensed Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Item 6.
Exhibits
Signatures
EX-31.1
Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
EX-31.2
Certification of Principal Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
EX-32.1
Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report.
EX-101
XBRL Instance Document
XBRL Schema Document
XBRL Calculation Linkbase Document
XBRL Labels Linkbase Document
XBRL Presentation Linkbase Document
XBRL Definition Linkbase Document
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ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $2,718 (2012) and $2,285 (2011)
Inventories, net
Prepaid expenses and other current assets
Advances to suppliers
Income taxes receivable
Deferred income taxes
Total current assets
Property, plant, and equipment, net
Investment in Limoneira Company
Investment in unconsolidated entities
Goodwill
Other assets
Liabilities and shareholders’ equity
Current liabilities:
Payable to growers
Trade accounts payable
Accrued expenses
Income tax payable
Short-term borrowings
Dividend payable
Current portion of long-term obligations
Total current liabilities
Long-term liabilities:
Long-term obligations, less current portion
Total long-term liabilities
Commitments and contingencies:
Noncontrolling interest
Shareholders’ equity:
Common stock, $0.001 par value; 100,000
shares authorized; 14,787 (2012) and 14,770 (2011)
issued and outstanding
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total shareholders’ equity
The accompanying notes are an integral part of these consolidated condensed financial statements.
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CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Three months ended
April 30,
Six months ended
Net sales
Cost of sales
Gross margin
Selling, general and administrative
Operating income
Interest expense
Other income, net
Income before provision for income taxes
Provision for income taxes
Net income
Add: Net loss – noncontrolling interest
Net income attributable to Calavo Growers, Inc.
Calavo Growers, Inc.’s net income per share:
Basic
Diluted
Number of shares used in per share computation:
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CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) arising during period
Income tax benefit (expense) related to items of other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Comprehensive income
Comprehensive income – Calavo Growers, Inc.
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
Provision for losses on accounts receivable
Income from unconsolidated entities
Interest on contingent consideration
Revalue adjustment on contingent consideration
Stock-based compensation expense
Effect on cash of changes in operating assets and liabilities:
Accounts receivable
Income taxes payable
Trade accounts payable and accrued expenses
Net cash used in operating activities
Cash Flows from Investing Activities:
Acquisitions of and deposits on property, plant, and equipment
Distributions from unconsolidated entity
Net cash used in investing activities
Cash Flows from Financing Activities:
Payment of dividend to shareholders
Proceeds on revolving credit facilities, net
Payments on long-term obligations
Exercise of stock options
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Noncash Investing and Financing Activities:
Tax benefit related to stock option exercise
Collection for Beltran Infrastructure Advance
Unrealized investment holding gains (losses)
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1. Description of the business
Business
Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a global leader in the avocado industry and an expanding provider of value-added fresh food. Our expertise in marketing and distributing avocados, prepared avocados, and other perishable foods allows us to deliver a wide array of fresh and prepared food products to food distributors, produce wholesalers, supermarkets, and restaurants on a worldwide basis. We procure avocados principally from California, Mexico, and Chile. Through our various operating facilities, we sort, pack, and/or ripen avocados, tomatoes and/or Hawaiian grown papayas. Additionally, we also produce salsa and prepare ready-to-eat produce and deli products.
During the second quarter of 2012, we increased the number of our reportable segments. Renaissance Food Group, LLC (RFG), which was previously included in our Calavo Foods segment, has now been separated as a segment of its own. Accordingly, we now have three reportable operating segments, (1) Fresh products, (2) Calavo Foods, and (3) RFG. Segment results of the prior period have been reclassified to reflect these changes. Beginning with the second quarter of 2012, our Chief Executive Officer reviews our business as having three reportable segments. The change in segments was made as RFG ceased having similar economic characteristics to products included in our Calavo Foods segment.
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, 2011.
Recently Adopted Accounting Pronouncements
In December 2010, the FASB issued an update to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The adoption of this accounting guidance did not have a material impact on our financial position, results of operations or liquidity.
Recently Issued Accounting Standards
In June 2011, the FASB issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this standard will only impact the presentation of our consolidated financial statements and will have no impact on the reported results.
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In December 2011, the FASB issued guidance to defer the effective date for those aspects relating to the presentation of reclassification adjustments out of accumulated other comprehensive income. The adoption of this standard will only impact the presentation of our consolidated financial statements and will have no impact on the reported results.
In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We do not believe that adoption of this guidance will have a material impact on our financial position and results of operations.
Reclassifications
Certain items in the prior period consolidated condensed financial statements have been reclassified to conform to the current period presentation.
2. Information regarding our operations in different segments
As discussed in footnote 1, we now 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, tortilla chips and salsa. The RFG segment represents all operations related to the manufacturing and distribution of fresh-cut fruit, ready-to-eat vegetables, recipe-ready vegetables and deli meat products. Selling, general and administrative expenses, as well as other non-operating income/expense items, are evaluated by our Chief Executive Officer in the aggregate. We do not allocate assets, or specifically identify them to, our operating segments. The following table sets forth sales by product category, by segment (in thousands):
Third-party sales:
Avocados
Tomatoes
Papayas
Pineapples
Other fresh products
Food service
Retail and club
Total gross sales
Less sales incentives
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Six months ended April 30, 2012
Six months ended April 30, 2011
For the six months ended April 30, 2012 and 2011, inter-segment sales and cost of sales for Fresh products totaling $11.3 million and $8.6 million were eliminated. For the six months ended April 30, 2012 and 2011, inter-segment sales and cost of sales for Calavo Foods totaling $5.8 million were eliminated.
Three months ended April 30, 2012
Three months ended April 30, 2011
For the three months ended April 30, 2012 and 2011, inter-segment sales and cost of sales for Fresh products totaling $6.3 million and $4.3 million were eliminated. For the three months ended April 30, 2012 and 2011, inter-segment sales and cost of sales for Calavo Foods totaling $2.9 million and $2.8 million were eliminated.
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3. Inventories
Inventories consist of the following (in thousands):
Fresh fruit
Packing supplies and ingredients
Finished prepared foods
During the three and six-month periods ended April 30, 2012 and 2011, we were not required to and did not record any provisions to reduce our inventories to the lower of cost or market.
4. Related party transactions
Certain members of our Board of Directors market avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers. During the three months ended April 30, 2012 and 2011, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $1.8 million and $2.0 million. During the six months ended April 30, 2012 and 2011, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $2.1 million and $3.5 million. Amounts payable to these board members were $ 1.1 million and $0.1 million as of April 30, 2012 and October 31, 2011.
During the three and six months ended April 30, 2012 and 2011, we received $0.1 million as dividend income from Limoneira Company.
The three previous owners and current executives of RFG have a majority ownership of certain entities that provide various services to RFG. RFG’s California operating facility leases a building from LIG partners, LLC (LIG) pursuant to an operating lease. LIG is majority owned by an entity owned by such three executives of RFG. For the three months ended April 30, 2012, total rent paid to LIG was $0.1 million. For the six months ended April 30, 2012, total rent paid to LIG was $0.3 million. Additionally, RFG sells cut produce and purchases raw materials, obtains transportation services, and shares costs for certain utilities with Third Coast Fresh Distribution (Third Coast). Third Coast is majority owned by an entity owned by such three executives of RFG. For the three months ended April 30, 2012, total sales made to Third Coast were $0.7 million. For the six months ended April 30, 2012, total sales made to Third Coast were $1.5 million. For the three months April 30, 2012, total purchases made from Third Coast were $0.5 million. For the six months April 30, 2012, total purchases made from Third Coast were $1.0 million. Amounts due from Third Coast were $0.4 million and $0.3 million at April 30, 2012 and October 31, 2011. Amounts due to Third Coast were $0.2 million at April 30, 2012 and October 31, 2011.
5. Other assets
Other assets consist of the following (in thousands):
Intangibles, net
Grower advances
Loan to Agricola Belher
Other
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Intangible assets consist of the following (in thousands):
October 31, 2011
Customer list/relationships
Trade names
Trade secrets/recipes
Brand name intangibles
Non-competition agreements
We anticipate recording amortization expense of approximately $0.7 million for the remainder of fiscal 2012, with $1.4 million of amortization expense for each of the fiscal years 2013 through 2015. We anticipate recording amortization expense of approximately $1.3 million for fiscal year 2016. The remainder of approximately $3.5 million will be amortized over fiscal years 2017 through 2023.
6. Stock-Based Compensation
In April 2011, our shareholders approved the Calavo Growers, Inc. 2011 Management Incentive Plan (the “2011 Plan”). All directors, officers, employees and consultants (including prospective directors, officers, employees and consultants) of Calavo and its subsidiaries are eligible to receive awards under the 2011 Plan. Up to 1,500,000 shares of common stock may be issued by Calavo under the 2011 Plan. As a result of such new plan, no new awards will be made under our 2005 Stock Incentive Plan.
The 2005 Stock Incentive Plan, was a stock-based compensation plan, under which employees and directors may be granted options to purchase shares of our common stock. We anticipate terminating such plan in the near future.
On January 26, 2012, all 12 of our non-employee directors were granted 1,000 restricted shares each (total of 12,000 shares). These shares have full voting rights and participate in dividends as if unrestricted. The closing price of our stock on such date was $27.68. On January 1, 2013, as long as the directors are still serving on the board, these shares lose their restriction and become non-forfeitable and transferable. These shares were granted pursuant to our 2011 Management Incentive Plan.
Stock options are granted with exercise prices of not less than the fair market value at grant date, generally vest over one to five years and generally expire two to five years after the grant date. We settle stock option exercises with newly issued shares of common stock.
We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to vest. We measure the fair value of our stock based compensation awards on the date of grant.
A summary of stock option activity, related to our 2005 Stock Incentive Plan, is as follows (in thousands, except for per share amounts):
Outstanding at October 31, 2011
Exercised
Outstanding at April 30, 2012
Exercisable at April 30, 2012
At April 30, 2012, outstanding stock options had a weighted-average remaining contractual term of 5.2 years. At April 30, 2012, exercisable stock options had a weighted-average remaining contractual term of 3.9 years. The total recognized stock-based compensation expense was insignificant for the three months ended April 30, 2012.
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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):
At April 30, 2012, outstanding stock options had a weighted-average remaining contractual term of 1.9 years. The total recognized stock-based compensation expense was $0.1 million for the three months ended April 30, 2012, and $0.2 million for the six months ended April 30, 2012.
7. Other events
Dividend payment
On December 12, 2011, we paid a $0.55 per share dividend in the aggregate amount of $8.1 million to shareholders of record on December 2, 2011.
Contingencies
Hacienda Suits — During the third quarter of fiscal year 2012, we received an update from our outside legal counsel regarding the Hacienda’s examination of the tax year ended December 31, 2004. As previously disclosed, we were awaiting the resolution of two outstanding tax assessments from the Hacienda for which we had previously received unfavorable rulings. The appellate court, via a second resolution, upheld the lower court’s decision on these two remaining items. Management, as well as our outside legal counsel, still believes the company’s position is correct and the final outcome should have been in our favor.
Based on discussions with our outside legal counsel in Mexico, we do not believe it is likely that we will be able to appeal this decision any further (i.e. to the Mexican Supreme Court). The total assessment related to these allegations is estimated to be approximately $1.9 million, which we recorded as income tax expense and income tax payable as of and for the period ended April 30, 2012.
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.
8. Fair value measurements
A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).
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The following table sets forth our financial assets and liabilities as of April 30, 2012 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:
Assets at Fair Value:
Investment in Limoneira Company(1)
Total assets at fair value
The investment in Limoneira Company consists of marketable securities in the Limoneira Company stock. We currently own approximately 15% of Limoneira’s outstanding common stock. These securities are measured at fair value by quoted market prices. Limoneira’s stock price at April 30, 2012 and October 31, 2011 equaled $16.81 per share and $17.35 per share. Unrealized gains and losses are recognized through other comprehensive income. Unrealized investment holding losses arising during the three months ended April 30, 2012 and 2011 were $2.0 million and $0.8 million. Unrealized investment holding losses arising during the six months ended April 30, 2012 were $0.9 million. Unrealized investment holding gains arising during the six months ended April 30, 2011 were $3.1 million.
Liabilities at fair value:
Salsa Lisa contingent consideration(2)
RFG contingent consideration(2)
Total liabilities at fair value
Each period we revalue the contingent consideration obligations to their fair value and record increases or decreases in the fair value into selling, general and administrative expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue and expense estimates. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period. Total net increase to the contingent considerations during the three and six months ended April 30, 2012 totaled $0.1 million and $0.2 million.
The following is a reconciliation of the beginning and ending amounts of the contingent consideration for Salsa Lisa and RFG:
Salsa Lisa contingent consideration
RFG contingent consideration
Total
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9. Noncontrolling interest
The following table reconciles shareholders’ equity attributable to noncontrolling interest related to the Salsa Lisa acquisition (in thousands):
Noncontrolling interest, beginning
Net loss attributable to noncontrolling interest
Noncontrolling interest, ending
10. Subsequent events
We have evaluated subsequent events to assess the need for potential recognition or disclosure in this Quarterly Report on Form 10-Q. Such events were evaluated through the date these financial statements were issued. Based upon this evaluation, it was determined that no subsequent events occurred that require recognition in the financial statements, except as disclosed in footnote 7.
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This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the year ended October 31, 2011 of Calavo Growers, Inc. (we, Calavo, or the Company).
Recent Developments
Net Sales
The following table summarizes our net sales by business segment for each of the three and six-month periods ended April 30, 2012 and 2011:
Net sales to third-parties:
Fresh products
Calavo Foods
RFG
Total net sales
As a percentage of net sales:
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Net sales for the second quarter of fiscal 2012, compared to fiscal 2011, increased by $20.3 million, or 17.1%. The increase in sales, when compared to the same corresponding prior year period, is primarily related to the sales of RFG, which was acquired on June 1, 2011. Not considering RFG, we experienced a decrease in Fresh product sales during the second quarter of fiscal 2012, which was due primarily to decreased sales of Mexican and California sourced avocados, as well as tomatoes, partially offset by an increase in sales of Chilean sourced avocados and pineapples.
Net sales for the six months ended April 30, 2012, compared to fiscal 2011, increased by $46.3 million, or 22.1%. The increase in sales, when compared to the same corresponding prior year period, is primarily related to the sales of RFG. Not considering RFG, we experienced a decrease in Fresh product sales during the second quarter of fiscal 2012, which was due primarily to decreased sales of Mexican and California sourced avocados, as well as tomatoes, partially offset by an increase in sales of Chilean sourced avocados and pineapples. While the procurement of fresh avocados related to our Fresh products segment is very seasonal, our Calavo Foods business is generally not subject to a seasonal effect.
Second Quarter 2012 vs. Second Quarter 2011
Net sales delivered by the Fresh products business decreased by approximately $15.9 million, or 14.8%, for the second quarter of fiscal 2012, when compared to the same period for fiscal 2011. As discussed above, this decrease in Fresh product sales during the second quarter of fiscal 2012 was primarily related to decreased sales of Mexican and California sourced avocados and tomatoes, partially offset by an increase in sales from Chilean sourced avocados and pineapples. See details below.
Sales of Mexican sourced avocados decreased $15.0 million, or 21.4%, for the second quarter of 2012, when compared to the same prior year period. The decrease in Mexican sourced avocados was due to a decrease in the sales price per carton, which decreased by approximately 32.0%, when compared to the same prior year period. We attribute this decrease primarily to a higher overall volume of avocados in the marketplace, partially offset by increase in pounds sold of 7.0 million pounds or 15.6%, when compared to the same prior year period.
Sales of tomatoes decreased $4.2 million, or 32.2%, for the second quarter of fiscal 2012, when compared to the same period for fiscal 2011. The decrease in sales for tomatoes is primarily due to a decrease in the sales price per carton of 63.3%, when compared to the same prior year period. We attribute most of the decrease in the per carton selling price to the higher volume of tomatoes in the U.S. marketplace, as compared to prior year same period, due primarily to cold weather in the prior year which reduced supplies and delayed harvests. Partially offsetting this decrease is an increase in cartons sold of 84.9%, when compared to the same prior year period. This increase of tomatoes sold is due primarily to a freeze in Mexico in the prior year that resulted in delayed tomato harvests.
Sales of California sourced avocados decreased $0.5 million, or 2.4%, for the second quarter of 2012, when compared to the same prior year period. The decrease in California sourced avocados was due to a decrease in the sales price per carton, which decreased 26.8%, when compared to the same prior year period. Partially offsetting this decrease is an increase in pound of avocados sold by 4.2 million or 33.3%, when compared to the same prior year period. We attribute most of this increase in volume and decrease in per sale price per carton to the larger California avocado crop in 2012, when compared to 2011.
Partially offsetting such decreases was an increase in sales of Chilean sourced avocados, which increased $1.6 million, or 442.5% for the second quarter of 2012, when compared to the same prior year period. The increase in Chilean sourced avocados was due to an increase in pounds sold. Chilean sourced avocados sales reflect an increase in 1.5 million pounds of avocados sold, or 508.3%, when compared to the same prior year period. We attribute much of this increase in volume to the larger Chilean avocado crop in 2012, when compared to prior year.
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Sales of pineapples increased $1.4 million, or 231.2%, for the second quarter of 2012, when compared to the same prior year period. The increase in sales of pineapples was due to an increase in units sold of 254.2%, when compared to the same prior year period. This increase is primarily related to a new supplier of pineapples, that has provided a more reliable supply of pineapples.
Six Months Ended 2012 vs. Six Months Ended 2011
Net sales delivered by the Fresh products business decreased by approximately $25.4 million, or 13.5%, for the six months ended April 30, 2012, when compared to the same period for fiscal 2011. As discussed above, this decrease in Fresh product sales during the first six months of fiscal 2012 was primarily related to decreased sales of Mexican and California sourced avocados and tomatoes. These decreases were partially offset, however, by increased sales from Chilean sourced avocados and pineapples. See details below.
Sales of California sourced avocados decreased $13.1 million, or 39.2%, for the six months ended April 30, 2012, when compared to the same prior year period. The decrease in California sourced avocados was due to a combination of a decrease in pounds sold and a decrease in the sales price per carton. California sourced avocados sales reflect a decrease in 7.0 million pounds of avocados sold or 28.5%, when compared to the same prior year period. We attribute most of this decrease in volume to the large California avocado crop in 2010, which contributed to significant deliveries in November 2010. In addition, the sales price per carton decreased by approximately 15.0%. We attribute this decrease primarily to a higher overall volume of avocados in the marketplace.
Sales of Mexican sourced avocados decreased $8.9 million, or 7.2%, for the six months ended April 30, 2012, when compared to the same prior year period. The decrease in Mexican sourced avocados was due to a decrease in the sales price per carton, which decreased by approximately 20.5%, when compared to the same prior year period. We attribute this decrease primarily to a higher overall volume of avocados in the marketplace. Partially offsetting this decrease, is an increase in pounds sold of 15.3 million pounds or 16.7%, when compared to the same prior year period.
Sales of tomatoes decreased $9.0 million, or 44.6%, for the six months ended April 30, 2012, when compared to the same period for fiscal 2011. The decrease in sales for tomatoes is primarily due to a decrease in the sales price per carton of 53.7%, when compared to the same prior year period. We attribute most of the decrease in the per carton selling price to the higher volume of tomatoes in the U.S. marketplace, due primarily to cold weather which reduced supplies and delayed harvests in prior year. Partially offsetting this decrease is an increase in cartons sold of 19.7%, when compared to the same prior year period. This increase of tomatoes sold is due primarily to a freeze in Mexico in the prior year that resulted in delayed tomato harvests.
Partially offsetting such decreases was an increase in sales of pineapples, which increased $2.6 million, or 441.6%, for the six months ended April 30, 2012, when compared to the same prior year period. The increase in sales of pineapples was due to an increase in units sold of 519.7%, when compared to the same prior year period. This increase is primarily related to a new supplier of pineapples, that has provided a more reliable supply of pineapples.
Sales of Chilean sourced avocados increased $1.7 million, or 56.3% for first six months of fiscal 2012, when compared to the same prior year period. The increase in Chilean sourced avocados was due to an increase in pounds sold. Chilean sourced avocados sales reflect an increase in 1.4 million pounds of avocados sold, or 52.0%, when compared to the same prior year period. We attribute much of this increase in volume to the larger Chilean avocado crop in 2012, when compared to prior year.
We anticipate that California avocado sales will experience an increase during our third fiscal quarter of 2012 as compared to the second quarter of 2012. Additionally, we believe that the sales volume of California grown avocados will increase in third quarter of fiscal 2012, when compared to the same prior year period. This increase is due to a larger expected California avocado crop.
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We anticipate that net sales related to Mexican sourced avocados and tomatoes will decrease during our third fiscal quarter of 2012, as compared to the second fiscal quarter of 2012. We anticipate that sales of Mexican grown avocados will decrease in the third quarter of fiscal 2012, when compared to the same prior year period, due to higher volume of avocados in the marketplace, which should decrease overall sales prices. We anticipate that sales volume for tomatoes will increase in the third quarter of fiscal 2012, when compared to the same prior year period. This increase is due to a larger expected tomato crop.
Sales for Calavo Foods for the quarter ended April 30, 2012, when compared to the same period for fiscal 2011, increased $0.1 million, or 1.2%. This increase is due to an increase in sales of Calavo tortilla chips which increased approximately $0.1 million, or 121.7%, in the second quarter of fiscal year 2012, when compared to the same prior year period, as well as an increase in sales of Calavo Salsa Lisa which increased approximately $0.1 million, or 18.8%, in the second quarter of fiscal year 2012, when compared to the same prior year period. Partially offsetting these increases, is a decrease of sales of prepared guacamole products of 0.1 million or 0.8%. This decrease was primarily related to a decrease in overall pounds sold by 17.2%, partially offset by 17.4% increase in the average net selling price per pound for both our frozen guacamole products and our refrigerated guacamole products (formerly high-pressure).
Six Months Ended 2011 vs. Six Months Ended 2010
Sales for Calavo Foods for the quarter ended April 30, 2012, when compared to the same period for fiscal 2011, increased $0.7 million, or 3.4%. This increase is due to an increase in sales of Calavo Salsa Lisa, which increased approximately $0.5 million, or 79.3%, an increase in sales of Calavo tortilla chips, which increased approximately $0.2 million, or 36.9%, and an increase of sales of prepared guacamole products of 0.1 million or 0.4%. This increase was primarily related to an 18.8% increase in the average net selling price per pound for our frozen and refrigerated guacamole products (formerly high-pressure), partially offset by a decrease in overall pounds sold by 15.5%.
RFG’s sales for the three and six months ended April 30, 2012 was $36.1 million and $71.0 million. As the acquisition of RFG was completed on June 1, 2011, no comparable prior period results are available.
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Gross Margins
The following table summarizes our gross margins and gross profit percentages by business segment for each of the three and six-month periods ended April 30, 2012 and 2011:
Gross margins:
Total gross margins
Gross profit percentages:
Consolidated
Our cost of goods sold consists predominantly of fruit costs, packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products and other direct expenses pertaining to products sold. Gross margins increased by approximately $5.4 million, or 57.4%, for the second quarter of fiscal 2012, when compared to the same period for fiscal 2011. This increase was attributable to gross margin increases in all of our segments (Fresh products, Calavo Foods, and RFG). Gross margins increased by approximately $8.7 million, or 50.1%, for the first six months of fiscal 2012 when compared to the same period for fiscal 2011. This increase was attributable to all of our segments (Fresh products, Calavo Foods, and RFG).
During our three and six-month periods of fiscal 2012, as compared to the same prior year periods, the increase in our fresh products segment gross margin percentage was primarily related to an increase in the gross margin percentage for California avocados. This was due to a significant increase in the volume of California avocados sold in the second quarter of fiscal 2012, which increased 33.5%, when compared to the same prior year period. This increase was primarily related to the larger California avocado crop for 2012, when compared to prior year. This had the effect of decreasing our fixed per pound costs, which, as a result, positively impacted gross margins. In addition, Mexican sourced avocados had an increased margin by percentage. This is due to lower fruit costs per pound in the second quarter of fiscal 2012, which decreased by 38.9%, when compared to the same prior year period. Fruit costs for the first six months of fiscal 2012 decreased 25.3%, when compared to the same prior year period. We believe this decrease was primarily related to the increase in the availability of avocados in the U.S. marketplace, when compared to the same prior year period. In addition, the U.S. Dollar to Mexican Peso exchange rate strengthened in the second fiscal quarter of 2012, when compared to the same prior period. All of these combined had the effect of decreasing our per pound costs related to Mexican sourced avocados, which, as a result, positively impacted gross margins.
The Calavo Foods segment gross margin for the three and six month periods of fiscal 2012, when compared to the same prior year period, increased primarily as a result of lower fruit and operating costs, partially offset by a decrease in total pounds sold. Fruit costs for the second quarter of fiscal 2012 decreased 38.9%, when compared to the same prior year period. Fruit costs for the first six months of fiscal 2012 decreased 25.3%, when compared to the same prior year period. These decreases in fruit costs are due to the increase in the availability of avocados in the U.S. marketplace, when compared to same prior year period. In addition, the strengthening of the U.S. Dollar compared to the Mexican Peso, decreased our per pound costs. All of these combined had the effect of decreasing our per pound costs, which, as a result, positively impacted gross margins. We anticipate that the gross margin percentage for our Calavo Foods segment will continue to experience significant fluctuations during this fiscal year primarily due to the uncertainty of the cost of fruit that will be used in the production process. In addition, any significant fluctuation in the exchange rate between the U.S. Dollar and the Mexican Peso may have a material impact on future gross margins for our Fresh products and Calavo Foods segments.
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RFG’s gross margin for the three and six months ended April 30, 2012 was $2.8 million and $5.3 million. As the acquisition of RFG was completed on June 1, 2011, no comparable prior period results are available.
Selling, General and Administrative
Percentage of net sales
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 $2.1 million, or 37.3%, for the three months ended April 30, 2012, when compared to the same period for fiscal 2011. This increase was primarily related to the acquisition of RFG which contributed $1.9 million in selling, general and administrative expenses for the three months ended April 30, 2012. The remaining increase of $0.2 million is due to higher corporate costs, including, but not limited to, management bonuses (totaling approximately $0.3 million), stock-based compensation expense (totaling approximately $0.1 million), partially offset by decreases in legal fees (totaling approximately $0.1 million), and consulting fees (totaling approximately $0.1 million).
Selling, general and administrative expenses increased $4.7 million, or 45.0%, for the six months ended April 30, 2012, when compared to the same period for fiscal 2011. This increase was primarily related to the acquisition of RFG which contributed $3.8 million in selling, general and administrative expenses for the six months ended April 30, 2012. The remaining increase of $0.9 million is due to higher corporate costs, including, but not limited to, management bonuses (totaling approximately $0.5 million), the fair value adjustment of the contingent consideration related to the acquisition of RFG (totaling approximately $0.2 million), stock-based compensation expense (totaling approximately $0.1 million), other administration fees (totaling approximately $0.1 million), and communication expense (totaling approximately $0.1 million), partially offset by decrease in legal fees (totaling approximately $0.1 million).
Provision for Income Taxes
Percentage of income before
provision for income taxes
For the second quarter of fiscal 2012, our provision for income taxes was $4.7 million, as compared to $1.6 million recorded for the comparable prior year period. During the third quarter of fiscal year 2012, we received an update from our outside legal counsel regarding the Hacienda’s examination of the tax year ended December 31, 2004. As previously disclosed, we were awaiting the resolution of two outstanding tax assessments from the Hacienda for which we had previously received unfavorable rulings. The appellate court, via a second resolution, upheld the lower court’s decision on these two remaining items. Management, as well as our outside legal counsel, still believes the company’s position is correct and the final outcome should have been in our favor.
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For the first six months of fiscal 2012, our provision for income taxes was $6.4 million, as compared to $3.0 million recorded for the comparable prior year period. Excluding the Hacienda assessment, mentioned above, we expect our effective tax rate to approximate 39.0% during fiscal 2012.
Liquidity and Capital Resources
Cash used in operating activities was $0.1 million for the six months ended April 30, 2012, compared to $5.3 million used in operations for the similar period in fiscal 2011. Operating cash flows for the six months ended April 30, 2012 reflect our net income of $5.2 million, net non-cash charges (depreciation and amortization, stock compensation expense, interest on contingent consideration, and income from unconsolidated entities) of $2.9 million and a net decrease in the noncash components of our operating capital of approximately $8.2 million.
Our operating capital decrease includes a net increase in accounts receivable of $15.4 million, an increase in inventory of $7.2 million, and an increase in prepaid expenses and other current assets of $0.6 million and, partially offset by an increase in payable to growers of $7.4 million, a net increase in income tax payable of $3.7 million, a decrease in advances to suppliers of $2.0 million, an increase in trade accounts payable and accrued expenses of $1.8 million and a decrease in other assets of $0.1 million.
The increase in our accounts receivable, as of April 30, 2012, when compared to October 31, 2011, primarily reflects higher sales recorded in the month of April 2012, as compared to October 2011. The increase in inventory is primarily related to an increase in the fresh fruit on hand at April 30, 2012. This was primarily driven by an increase in the volume of Mexican avocados purchased during our second fiscal quarter of 2012, as well as more fruit being delivered for California sourced avocados in the month of April 2012, as compared to October 2011. The increase in payable to growers primarily reflects an increase in California fruit delivered in the month of April 2012, as compared to October 2011. The net increase in income tax payable relates primarily to the Hacienda assessment from the examination of tax year end December 31, 2004 and income from operations through the six months ended April 30, 2012. The decrease in advances to suppliers primarily reflects fewer advances made to Agricola Belher related to the receipt of tomatoes in April 2012, compared to October 2011.
Cash used in investing activities was $3.4 million for the six months ended April 30, 2012 and related principally to the purchase of property, plant and equipment items of $3.5 million, partially offset by a cash distribution from an unconsolidated entity of $0.1 million.
Cash provided by financing activities was $5.4 million for the six months ended April 30, 2012, which related principally to the proceeds from our credit facilities totaling $15.3 million and exercises of stock options of $0.2 million, partially offset by the payment of our $8.1 million dividend and payments on long-term obligations of $2.0 million.
Our principal sources of liquidity are our existing cash balances, cash generated from operations and amounts available for borrowing under our existing credit facilities. Cash and cash equivalents as of April 30, 2012 and October 31, 2011 totaled $4.7 million and $2.8 million. Our working capital at April 30, 2012 was $11.5 million, compared to $8.6 million at October 31, 2011.
We believe that cash flows from operations and available credit facilities will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements. We will continue to evaluate grower recruitment opportunities and exclusivity arrangements with food service companies to fuel growth in each of our business segments. Our non-collateralized, revolving credit facilities with Farm Credit West, PCA and Bank of America, N.A. expire in February 2016. Under the terms of these agreements, we are advanced funds for both working capital and long-term productive asset purchases. Total credit available under these combined borrowing agreements was $65 million, with a weighted-average interest rate of 1.8% and 1.6% at April 30, 2012 and October 31, 2011. Under these credit facilities, we had $33.2 million and $17.9 million outstanding as April 30, 2012 and October 31, 2011. These credit facilities contain various financial covenants, the most significant relating to Tangible Net Worth (as defined), Current Ratio (as defined), and Fixed Charge Coverage Ratio (as defined). We were in compliance with all such covenants at April 30, 2012.
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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, 2011. For a summary of the contractual commitments at October 31, 2011, see Part II, Item 7, in our 2011 Annual Report on Form 10-K.
Impact of Recently Issued Accounting Pronouncements
See footnote 1 to the consolidated condensed financial statements that are included in this Quarterly Report on Form 10-Q.
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Our financial instruments include cash and cash equivalents, accounts receivable, payable to growers, accounts payable, current and long-term borrowings pursuant to our credit facilities with financial institutions, and long-term, fixed-rate obligations. All of our financial instruments are entered into during the normal course of operations and have not been acquired for trading purposes. The table below summarizes interest rate sensitive financial instruments and presents principal cash flows in U.S. dollars, which is our reporting currency, and weighted-average interest rates by expected maturity dates, as of April 30, 2012.
Cash and cash equivalents (1)
Accounts receivable (1)
Advances to suppliers (1)
Liabilities
Payable to growers (1)
Accounts payable (1)
Current borrowings pursuant to credit
facilities (1)
Fixed-rate long-term obligations (2)
Except for the buyout option for Calavo Salsa Lisa, LLC, as mentioned on Note 16 on Form 10-K for our fiscal year ended October 31, 2011, we were not a party to any derivative instruments during the fiscal year. It is currently our intent not to use derivative instruments for speculative or trading purposes. Additionally, we do not use any hedging or forward contracts to offset market volatility.
Our Mexican-based operations transact business in Mexican pesos. Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy domestic cash needs. Historically, the consistency of the spot rate for the Mexican peso has led to a small-to-moderate impact on our operating results. We do not anticipate using derivative instruments to hedge fluctuations in the Mexican peso to U.S. dollar exchange rates during fiscal 2012. Total foreign currency losses for the three months and six months ended April 30, 2012, net of gains, were less than $0.1 million. Total foreign currency losses for the three months and six months ended April 30, 2011, net of gains, were $0.2 million and $0.3 million.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting during the quarter ended April 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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See Note 7 to our financial statements set forth in Part 1, Item 1 of this Current Report on Form 10-Q, which is incorporated by reference into this Item 1, for a discussion of the resolution of the outstanding tax assessments brought against us by Mexican tax authorities.
We are involved in litigation in the ordinary course of business, none of which we believe will have a material adverse impact on our financial position or results of operations.
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, 2011. 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 2011 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.
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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)
Lecil E. Cole
Chairman of the Board of Directors,
Chief Executive Officer and President
(Principal Executive Officer)
Arthur J. Bruno
Chief Operating Officer, Chief Financial Officer and
Corporate Secretary
(Principal Financial Officer)
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INDEX TO EXHIBITS
ExhibitNumber
Description
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