Calavo Growers - 10-Q quarterly report FY2014 Q3

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended July 31, 2014

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 July 31, 2014 was 15,762,405

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CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Calavo Growers, Inc. and its consolidated subsidiaries (Calavo, the Company, we, us or our) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flows, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of restructuring and integration plans; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Calavo and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic trends and events; the competitive pressures faced by Calavo’s businesses; the development and transition of new products and services (and the enhancement of existing products and services) to meet customer needs; integration and other risks associated with business combinations; the hiring and retention of key employees; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including, but not limited to, the items discussed in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013, and those detailed from time to time in our other filings with the Securities and Exchange Commission. Calavo assumes no obligation and does not intend to update these forward-looking statements.

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CALAVO GROWERS, INC.

INDEX

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share amounts)

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

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)

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

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

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

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

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

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Business

Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a global leader in the avocado industry and an expanding provider of value-added fresh food. Our expertise in marketing and distributing avocados, prepared avocados, and other perishable foods allows us to deliver a wide array of fresh and prepared food products to food distributors, produce wholesalers, supermarkets, and restaurants on a worldwide basis. We procure avocados principally from California, Mexico, and Chile. Through our various operating facilities, we sort, pack, and/or ripen avocados, tomatoes, pineapples and/or Hawaiian grown papayas. Additionally, we also produce salsa and prepare ready-to-eat produce and deli products.

The accompanying unaudited consolidated condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2013.

Correction of Immaterial Errors Within Previously Issued Consolidated Condensed Financial Statements

In connection with the preparation of our accompanying Consolidated Condensed Financial Statements, we identified an immaterial error in our Consolidated Condensed Balance Sheet as of April 30, 2014, included within our Form 10-Q for the quarter ended April 30, 2014, as a result of the incorrect recognition of cash as of April 30, 2014 for a wire transfer initiated on April 30, 2014, but not received until May 1, 2014. Accordingly, there was a $10.0 million overstatement within “Cash and cash equivalents,” a $5.4 million overstatement of “Additional paid-in capital” and a $4.6 million overstatement of “Noncontrolling interest, FreshRealm.” Additionally, our Consolidated Condensed Statement of Cash Flows presented an overstatement of $10.0 million within “Cash Flows from Financing Activities,” under the line item “Proceeds from issuance of FreshRealm stock.” Our management evaluated the materiality of these errors both qualitatively and quantitatively in accordance with Staff Accounting Bulletin No. 99, Materiality, and determined that these errors were not material to our previously reported quarterly financial statements as of and for the three and six months ended April 30, 2014. The aforementioned errors have no impact on this Quarterly Report on Form 10-Q, nor any future periodic filings, except that the Consolidated Condensed Statement of Cash Flows for the six months ended April 30, 2014 will be corrected to properly reflect this immaterial error in our Form 10-Q for the quarter ended April 30, 2015.

The effect of recording this immaterial error correction in our consolidated condensed balance sheet as of April 30, 2014 and the related consolidated condensed statement of cash flows for the six months ended April 30, 2014 is as follows:

The correction of this immaterial error on the consolidated condensed statements of income for the three and six months ended April 30, 2014 was inconsequential and corrected in the three months ended July 31, 2014.

Recently Adopted Accounting Pronouncements

In February 2013, the FASB issued a standard that revised the disclosure requirements for items reclassified out of accumulated other comprehensive income and requires entities to present information about significant items reclassified out of accumulated other comprehensive income by component either (1) on the face of the statement where net income is presented or (2) as a separate disclosure in the notes to the financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2012. The adoption of this standard had no impact on our financial statements.

In July 2013, the FASB issued a standard permitting the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the United States Treasury rate and London Interbank Offered Rate (“LIBOR”). In addition, the restriction on using different benchmark rates for similar hedges is removed. The Company is required to adopt these provisions prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013. The adoption of this standard had no impact on our financial statements.

Recently Issued Accounting Standards

In March 2013, the FASB issued a standard which requires the release of a Company’s cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This guidance is effective for annual reporting periods beginning after December 15, 2013. The adoption of this amendment will not have a material effect on our financial statements.

In July 2013, the FASB issued a standard to clarify the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists as of the reporting date. This guidance is effective for annual reporting periods beginning after December 15, 2013. The adoption of this amendment will not have a material effect on our financial statements.

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

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For the three months ended July 31, 2014 and 2013, inter-segment sales and cost of sales for Fresh products totaling $6.9 million and $5.5 million were eliminated. For the three months ended July 31, 2014 and 2013, inter-segment sales and cost of sales for Calavo Foods totaling $4.4 million and $4.1 million were eliminated.

For the nine months ended July 31, 2014 and 2013, inter-segment sales and cost of sales for Fresh products totaling $24.5 million and $24.1 million were eliminated. For the nine months ended July 31, 2014 and 2013, inter-segment sales and cost of sales for Calavo Foods totaling $12.0 million and $10.5 million were eliminated.

Inventories consist of the following (in thousands):

Inventories are stated at the lower of cost or market. 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 July 31, 2014 and October 31, 2013.

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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 July 31, 2014 and 2013, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $8.0 million and $11.0 million. During the nine months ended July 31, 2014 and 2013, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $9.2 million and $15.6 million. Amounts payable to these board members were $3.0 million and $3.3 million as of July 31, 2014 and October 31, 2013.

During the three months ended July 31, 2014 and 2013, we received $0.1 million as dividend income from Limoneira Company. During the nine months ended July 31, 2014 and 2013, we received $0.2 million as dividend income from Limoneira Company. Harold Edwards, who is a member of our Board of Directors, is the Chief Executive Officer of 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 three executives of RFG. For the three months ended July 31, 2014 and 2013, total rent paid to LIG was $0.1 million. For the nine months ended July 31, 2014 and 2013, total rent paid to LIG was $0.4 million. RFG’s Texas operating facility leases a building from THNC, LLC (THNC) pursuant to an operating lease. THNC is majority owned by an entity owned by three executives of RFG. For the three months ended July 31, 2014, total rent paid to THNC was $0.1 million. For the nine months ended July 31, 2014, total rent paid to THNC was $0.2 million. Additionally, RFG sells cut produce and purchases raw materials, obtains transportation services, and shares costs for certain utilities with Third Coast Fresh Distribution (Third Coast). Third Coast is majority owned by an entity owned by three executives of RFG. For the three months ended July 31, 2014 and 2013, total sales made to Third Coast were $0.3 million. For the nine months ended July 31, 2014 and 2013, total sales made to Third Coast were $0.8 million and $1.9 million. For the three months July 31, 2014 and 2013, total purchases made from Third Coast were $0.2 million. For the nine months July 31, 2014 and 2013, total purchases made from Third Coast were $0.3 million and $1.0 million. Amounts due from Third Coast were $0.4 million and $1.0 million at July 31, 2014 and October 31, 2013. Amounts due to Third Coast were $0.1 million at July 31, 2014 and October 31, 2013

Other assets consist of the following (in thousands):

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Intangible assets consist of the following (in thousands):

We anticipate recording amortization expense of approximately $0.3 million for the remainder of fiscal 2014, with $1.3 million of amortization expense for fiscal year 2015, $1.2 million for fiscal year 2016, $1.1 million for each of the fiscal years 2017 and 2018, and $0.8 million for years thereafter, through fiscal year 2023.

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 9, 2014, 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 $32.49. On January 1, 2015, 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.

On January 27, 2014, our executive officers were granted a total of 10,774 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 $30.50. These shares vest in one-third increments, on an annual basis, beginning January 1, 2015.

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

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

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

At July 31, 2014, outstanding stock options had a weighted-average remaining contractual term of 3.8 years. At July 31, 2014, exercisable stock options had a weighted-average remaining contractual term of 3.3 years. The total recognized stock-based compensation expense was insignificant for the three months ended July 31, 2014.

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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 July 31, 2014, outstanding stock options had a weighted-average remaining contractual term of 5.9 years. At July 31, 2014, exercisable stock options had a weighted-average remaining contractual term of 4.0 years. The total recognized stock-based compensation expense was $0.2 million and $0.5 million for the three and nine months ended July 31, 2014.

Dividend payment

On December 12, 2013, we paid a $0.70 per share dividend in the aggregate amount of $11.0 million to shareholders of record on November 29, 2013.

Contingencies

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

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 July 31, 2014 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:

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

The following table sets forth our financial assets as of July 31, 2014 that are measured on a non-recurring basis during the period, segregated by level within the fair value hierarchy:

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

For the nine months ended July 31, 2014, FreshRealm has incurred $1.0 million in expenses, which has been recorded in selling, general and administrative. For the three and nine months ended July 31, 2013, FreshRealm has incurred $0.5 million in expenses. Since inception, FreshRealm had $2.9 million in cumulative losses. See Note 10 for discussion on the deconsolidation of FreshRealm on May 2, 2014.

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On May 2, 2014, we closed our Second Amended and Restated Limited Liability Company Agreement (Agreement) by and among FreshRealm and the ownership members of FreshRealm. The effective date of this agreement was April 30, 2014. Pursuant to this agreement, Impermanence, LLC (Impermanence) was admitted as an ownership member of FreshRealm. Impermanence contributed $10.0 million to FreshRealm for 28.6% ownership. We agreed to dilute our ownership percentage in FreshRealm, as an injection of significant working capital would reduce the immediate need of Calavo to provide operating funds to FreshRealm and would also serve to preserve the value of our investment.

As a result of the admission of Impermanence, Calavo’s ownership was reduced from 71.1% to 50.8% and $4.6 million was attributed to noncontrolling interest. Additionally, effective April 1, 2014, the first $10.0 million of losses will be allocated primarily to Impermanence.

Even though Calavo controlled greater than 50% of the outstanding units of FreshRealm as of May 2, 2014, the minority/non-Calavo unit-holders held substantive participating rights. These rights existed primarily in two forms: (1) two out of a total of four board of director seats and (2) a provision in the Agreement that states that for situations for which the approval of the Members, as defined, (rather than the approval of the board of directors on behalf of the Members) is required by the Agreement, the Members shall act by Super-Majority Vote. Super-Majority Vote is defined in the Agreement as the affirmative vote of the holders of at least seventy percent of the outstanding units that are held by the Members. As such, Calavo cannot control FreshRealm through its two board of director seats, nor its 50.8% ownership. Based on the foregoing, we deconsolidated FreshRealm as of May 2, 2014.

As a result of the deconsolidation, we were required to record a gain related to this transaction. Pursuant to ASC 810-10-40-5, we calculated our gain on deconsolidation by considering: a) the aggregate of (1) the fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated and (2) the carrying amount of any noncontrolling interest in the former subsidiary; less b) the carrying amount of the former subsidiary’s assets and liabilities. See following table:

(As of May 2, 2014, in thousands)

We estimated the fair value of our noncontrolling interest in FreshRealm by performing a forecast projection analysis. This analysis was conducted with the consultation from a third party consulting firm. See Note 9 to the financial statements for additional information regarding our noncontrolling interest in FreshRealm. See Note 8 to the financial statements for additional information regarding the fair value calculation and assumptions used.

Based on the above, we recorded a gain on the deconsolidation of FreshRealm of $12.6 million, which has been recorded on the face of the income statement. Our investment in FreshRealm has been recorded as investment in unconsolidated subsidiaries on our balance sheet.

As of July 31, 2014, FreshRealm issued additional units to various 3rd parties, which reduced our ownership percentage to exactly 50%.

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.

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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, 2013 of Calavo Growers, Inc. (we, Calavo, or the Company).

Recent Developments

Dividend payment

On December 12, 2013, we paid a $0.70 per share dividend in the aggregate amount of $11.0 million to shareholders of record on November 29, 2013.

Contingencies

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

Deconsolidation of FreshRealm, LLC

On May 2, 2014, we closed our Second Amended and Restated Limited Liability Company Agreement (Agreement) by and among FreshRealm and the ownership members of FreshRealm. The effective date of this agreement was April 30, 2014. Pursuant to this agreement, Impermanence, LLC (Impermanence) was admitted as an ownership member of FreshRealm. Impermanence contributed $10.0 million to FreshRealm for 28.6% ownership. We agreed to dilute our ownership percentage in FreshRealm, as an injection of significant working capital would reduce the immediate need of Calavo to provide operating funds to FreshRealm and would also serve to preserve the value of our investment.

As a result of the admission of Impermanence, Calavo’s ownership was reduced from 71.1% to 50.8% and $4.6 million was attributed to noncontrolling interest. Additionally, effective April 1, 2014, the first $10.0 million of losses will be allocated primarily to Impermanence.

Even though Calavo controlled greater than 50% of the outstanding units of FreshRealm as of May 2, 2014, the minority/non-Calavo unit-holders held substantive participating rights. These rights existed primarily in two forms: (1) two out of a total of four board of director seats and (2) a provision in the Agreement that states that for situations for which the approval of the Members, as defined, (rather than the approval of the board of directors on behalf of the Members) is required by the Agreement, the Members shall act by Super-Majority Vote. Super-Majority Vote is defined in the Agreement as the affirmative vote of the holders of at least seventy percent of the outstanding units that are held by the Members. As such, Calavo cannot control FreshRealm through its two board of director seats, nor its 50.8% ownership. Based on the foregoing, we deconsolidated FreshRealm as of May 2, 2014.

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As a result of the deconsolidation, we were required to record a gain related to this transaction. Pursuant to ASC 810-10-40-5, we calculated our gain on deconsolidation by considering: a) the aggregate of (1) the fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated and (2) the carrying amount of any noncontrolling interest in the former subsidiary; less b) the carrying amount of the former subsidiary’s assets and liabilities. See following table:

(As of May 2, 2014, in thousands)

We estimated the fair value of our noncontrolling interest in FreshRealm by performing a forecast projection analysis. This analysis was conducted with the consultation from a third party consulting firm. See Note 9 to the Financial Statements for additional information regarding our noncontrolling interest in FreshRealm. See Note 8 to the Financial Statements for additional information regarding the fair value calculation and assumptions used.

Based on the above, we recorded a gain on the deconsolidation of FreshRealm of $12.6 million, which has been recorded on the face of the income statement. Our investment in FreshRealm has been recorded as investment in unconsolidated subsidiaries on our balance sheet.

As of July 31, 2014, FreshRealm issued additional units to various 3rd parties, which reduced our ownership percentage to exactly 50%.

Net Sales

The following table summarizes our net sales by business segment for each of the three and nine-month periods ended July 31, 2014 and 2013:

Summary

Net sales for the three months ended July 31, 2014, compared to fiscal 2013, increased by $23.8 million, or 12.2%. Net sales for the nine months ended July 31, 2014, compared to fiscal 2013, increased by $81.0 million, or 16.2%. The increases in sales, when compared to the same corresponding prior year periods, are related to increases in sales from all segments. We experienced an increase in RFG sales during the third quarter of fiscal 2014 and the nine months ended July 31, 2014, which was due primarily to increased sales from cut fruit and vegetables platters, as well as an increase in sales of deli products. We experienced an increase in Fresh product sales during the third quarter of fiscal 2014 and the nine months ended July 31, 2014, which was due primarily to increased sales of Mexican sourced avocados. Partially offsetting this increase in Fresh product sales, however, was a decrease in sales of California sourced avocados. We experienced an increase in our Calavo Foods segment during the third quarter of fiscal 2014 and the nine months ended July 31, 2014, which was due primarily to an increase in the sales of our guacamole products. While the procurement of fresh avocados related to our Fresh products segment is very seasonal, our Calavo Foods business is generally not subject to a seasonal effect.

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

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Fresh products

Third Quarter 2014 vs. Third Quarter 2013

Net sales delivered by the Fresh products business increased by approximately $4.2 million, or 3.3%, for the third quarter of fiscal 2014, when compared to the same period for fiscal 2013. As discussed above, this increase in Fresh product sales during the third quarter of fiscal 2014 was primarily related to increased sales of Mexican sourced avocados, partially offset by a decrease in sales from California sourced avocados. See details below.

Sales of Mexican sourced avocados increased $19.5 million, or 43.8%, for the third quarter of 2014, when compared to the same prior year period. The increase in Mexican sourced avocados was primarily due to an increase in in the pounds sold, which increased by approximately 12.5 million pounds, or 40.5%. In addition, the sales price per carton also increased. The increase for the sales price per carton for Mexican sourced avocados increased by approximately 2.3%. We attribute much of this change to a higher demand for quality avocados.

Partially offsetting this increase was a decrease in sales of California sourced avocados, which decreased $12.9 million, or 17.8%, for the third quarter of 2014, when compared to the same prior year period. The decrease in California sourced avocados was due to a decrease in pounds sold. California sourced avocados sales reflect a decrease in 25.1 million pounds of avocados sold, or 36.6%, when compared to the same prior year period. We attribute most of this decrease in volume to the cyclically smaller California avocado crop for fiscal 2014. Partially offsetting this decrease, however, was the increase in the sales price per carton, which increased by approximately 29.5%. We attribute this increase primarily to a lower overall volume of avocados in the marketplace and an overall increase in the demand of quality avocados.

Sales of tomatoes decreased to $0.6 million for the third quarter of fiscal 2014, compared to $3.3 million for the same period for fiscal 2013. The decrease in sales for tomatoes is due to a decrease in cartons sold to 0.1 million cartons from 0.3 million cartons. In addition to this decrease is a decrease in the sales price per carton, which decreased approximately 72.1%.

Nine Months Ended 2014 vs. Nine Months Ended 2013

Net sales delivered by the Fresh products business increased by approximately $30.3 million, or 9.4%, for the nine months ended July 31, 2014, when compared to the same period for fiscal 2013. As discussed above, this increase in Fresh product sales during the nine months ended July 31, 2014, was primarily related to increased sales of Mexican sourced avocados, partially offset by a decrease in sales from California sourced avocados. See details below.

Sales of Mexican sourced avocados increased $57.2 million, or 31.1%, for the nine months ended July 31, 2014, when compared to the same prior year period. The increase in Mexican sourced avocados was primarily due to an increase in the sales price per carton, which increased by approximately 26.0%. We attribute this increase primarily to a lower overall volume of avocados in the marketplace and an overall increase in the demand of quality avocados. In addition, there was an increase in the pounds sold, which increased by approximately 7.5 million pounds of avocados sold, or 4.1%, when compared to the same prior year period.

Sales of Chilean sourced avocados increased $2.5 million for the nine months ended July 31, 2014, 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 increased in 2.3 million pounds of avocados sold, when compared to the same prior year period. This increase in sales is due to the lower availability of other avocado sources, and an increased focus on obtaining an increased supply of avocados from more diversified sources.

Partially offsetting such increases was a decrease in sales of California sourced avocados, which decreased $26.3 million, or 25.9% for the nine months ended July 31, 2014, when compared to the same prior year period. The decrease in California sourced avocados was due to a decrease in pounds sold. California sourced avocados sales

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reflect a decrease in 41.0 million pounds of avocados sold, or 42.3%, when compared to the same prior year period. We attribute most of this decrease in volume to the cyclically smaller California avocado crop for fiscal 2014. Partially offsetting this decrease, however, was the increase in the sales price per carton, which increased by approximately 28.4%. We attribute this increase primarily to a lower overall volume of avocados in the marketplace and an overall increase in the demand for avocados.

Sales of tomatoes decreased to $19.7 million for the nine months ended July 31, 2014, compared to $22.7 million for the same period for fiscal 2013. The decrease in sales for tomatoes is due to a decrease in cartons sold to 1.9 million cartons from 2.6 million cartons. Partially offsetting this decrease is an increase in the sales price per carton, which increased approximately 19.3%. We attribute this increase in the per carton selling price primarily to the 2013 [tomato] suspension agreement, which increased the floor sales price of Mexican tomatoes sold in the U.S. marketplace. We do not anticipate any tomato sales during our 4^th fiscal quarter.

We anticipate that net sales related to Mexican sourced avocados will increase during our fourth fiscal quarter of 2014, as compared to the third fiscal quarter of 2014. We anticipate that sales of Mexican grown avocados will increase in the fourth quarter of fiscal 2014, when compared to the same prior year period, due to higher overall volume.

We anticipate that California avocado sales will experience a seasonal and cyclical decrease during our fourth fiscal quarter of 2014, as compared to the third quarter of fiscal 2014. We believe that there will be a decrease in California avocado volume when compared to the fourth fiscal quarter of 2013.

Calavo Foods

Third Quarter 2014 vs. Third Quarter 2013

Sales for Calavo Foods for the quarter ended July 31, 2014, when compared to the same period for fiscal 2013, increased $2.6 million, or 17.5%. This increase is due to an increase in sales of prepared guacamole products which increased approximately $2.7 million, or 19.5%, in the third quarter of fiscal year 2014, when compared to the same prior year period. The increase in sales of prepared guacamole was primarily related to an increase in overall pounds sold, which increased 1.3 million pounds, or 21.1%.

Nine Months Ended 2014 vs. Nine Months Ended 2013

Sales for Calavo Foods for the nine months ended July 31, 2014, when compared to the same period for fiscal 2013, increased $6.4 million, or 16.5%. This increase is due to an increase in sales of prepared guacamole products which increased approximately $6.8 million, or 18.5%, for the nine months ended July 31, 2014, when compared to the same prior year period. The increase in sales of prepared guacamole was primarily related to an increase in overall pounds sold, which increased 3.9 million pounds, or 24.5%, partially offset by a decrease in the average net selling price per pound for both our frozen guacamole products and our refrigerated guacamole products of approximately 2.6%, primarily due to a change in the product mix.

RFG

Third Quarter 2014 vs. Third Quarter 2013

Sales for RFG for the quarter ended July 31, 2014, when compared to the same period for fiscal 2013, increased $17.0 million, or 31.1%. This increase is due primarily to increased sales from cut fruit and vegetable platters, as well as an increase in sales of deli products. The overall increase in sales is primarily due to an increase in sales volume. Collectively, cut fruit, cut vegetable, and deli product sales increased 4.9 million units, or 23.8%. We believe the overall increase in sales volume is primarily due to an increase in demand for the variety of innovative products that we offer.

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Nine Months Ended 2014 vs. Nine Months Ended 2013

Sales for RFG for the nine months ended July 31, 2014, when compared to the same period for fiscal 2013, increased $44.3 million, or 31.9%. This increase is due primarily to increased sales from cut fruit and vegetable platters, as well as an increase in sales of deli products. The overall increase in sales is primarily due to an increase in sales volume. Collectively, cut fruit, cut vegetable, and deli product sales increased 15.2 million units, or 29.0%. We believe the overall increase in sales volume is primarily due to an increase in demand for the variety of innovative products that we offer.

Gross Margins

The following table summarizes our gross margins and gross profit percentages by business segment for each of the three and nine-month periods ended July 31, 2014 and 2013:

Summary

Our cost of goods sold consists predominantly of fruit costs, packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products and other direct expenses pertaining to products sold. Gross margins increased by approximately $2.9 million, or 15.9%, for the third quarter of fiscal 2014, when compared to the same period for fiscal 2013. Gross margins increased by approximately $10.9 million, or 25.4%, for the first nine months of fiscal 2014 when compared to the same period for fiscal 2013. These increases were attributable to gross margin increases in our Fresh products and RFG segments, partially offset by a decrease in our Calavo Foods segment.

Fresh products

During our three month periods of fiscal 2014, as compared to the same prior year periods, the decrease in our Fresh products segment gross margin percentage was primarily the result of a decrease in the gross margin percentage for California sourced avocados for the three month periods of fiscal 2014, as compared to the same prior year periods. This decrease is due to the smaller California avocado crop in fiscal 2014, which increases per pound operating costs and decreases the overall gross margin. Partially offsetting this decrease, Mexican sourced avocados gross margin percentage increased from 2.1% in prior year to 5.7% in the current year. In the current year, we were able to manage the spread between the sales price and the fruit cost of Mexican sourced avocados more effectively, as average sales prices increased 16.0%, while average costs of goods sold increased 15.0% from the second quarter of fiscal 2014 to the third quarter of fiscal 2014. In the prior year, average sales prices increased 17.8%, while average costs of goods sold increased 19.5% from the second quarter of fiscal 2013 to the third quarter of fiscal 2013.

During our nine months ended July 31, 2014, as compared to the same prior year periods, the increase in our Fresh products segment gross margin percentage was primarily the result of significantly higher Mexican sourced

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avocado fruit costs in the prior year that uncharacteristically increased at a pace faster than anticipated in the latter part of March 2013 and remained higher than expected through April 2013. In the prior year, the average sales price of Mexican sourced avocados increased 3.2%, yet average fruit costs increased 31.8% from the first quarter of fiscal 2013 to the second quarter of fiscal 2013. In the current year, we were able to manage the spread between the sales price and the fruit cost of Mexican sourced avocados more effectively, as average sales prices increased 16.8%, while average fruit costs increased 18.4% from the first quarter of fiscal 2014 to the second quarter of fiscal 2014.

Calavo Foods

The Calavo Foods segment gross margin percentage during our three and nine months ended July 31, 2014, when compared to the same prior year periods, decreased primarily due to an increase in fruit costs. Fruit costs increased during our three and nine months ended July 31, 2014, by approximately 16.1% and 20.7%. In addition, gross margins decreased due to an increase in sales of frozen, high volume but low margin customers. Partially offsetting these decreases to the gross margin percentage was the strengthening of the U.S. Dollar compared to the Mexican Peso, which decreased many of our per pound costs. 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.

RFG

RFG’s improved gross-margin is reflective of certain economies of scale resulting from significant sales growth (see discussion above), improved labor utilization and improved raw-material quality and yield. Benefits from superior fruit quality/yield extend beyond just lower fruit costs, but also reduce other costs, including the labor needed to process such fruit.

Selling, General and Administrative