Summary of CALAVO GROWERS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the year ended October 31, 2007 of Calavo Growers, Inc. (we, Calavo, or the Company). Certain prior year amounts have been reclassified to conform with the current period presentation.
Recent Developments
Dividend payment
In January 2008, we paid a $0.35 per share dividend in the aggregate amount of $5.0 million to shareholders of record on December 15, 2007. Capital Lease
In April 2008, we entered into a capital lease for various fixed assets related to our Swedesboro, New Jersey facility. The gross amount recorded in property, plant and equipment totaled approximately $1.1 million as of July 31, 2008.
Contingencies
Hacienda Suit - We are currently under examination by the Mexican tax authorities (Hacienda) for the tax year ended December 31, 2000 and December 31, 2004. We have received assessments totaling approximately $2.0 million and $4.5 million from Hacienda related to the amount of income at our Mexican subsidiary. Subsequent to that initial assessment, the Hacienda offered a settlement of approximately $400,000 related to the tax year 2000 assessment, which we declined. Based primarily on discussions with legal counsel and the evaluation of our claim, we maintain our belief that the Hacienda's position has no merit and that we will prevail. Accordingly, no amounts have been provided for in the financial statements as of July 31, 2008. We pledged our processed products building located in Uruapan, Michoacan, Mexico as collateral to Hacienda in regards to this assessment.
IRS examination- We are currently under examination by the Internal Revenue Service for the year ended October 31, 2005. We do not believe that the settlement of such examination will have a material adverse impact on our financial statements.
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.
Term Revolving Credit Agreement
In May 2008, we entered into a Term Revolving Credit Agreement (the "Agreement") with Farm Credit West, PCA. Under the terms of the Agreement, we are advanced funds for the purchase and installation of capital items and other corporate needs of the Company. Total credit available under the Agreement, which expires in February 2012, is now $30 million, up from $20 million. The credit facility contains various financial covenants, the most significant relating to working capital, tangible net worth (as defined), and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (as defined). We were in compliance with all such covenants at July 31, 2008.

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Business Acquisitions
Calavo and Lecil E. Cole, Suzanne Cole-Savard, Guy Cole, Eric Weinert, and Lecil E. Cole and Mary Jeanette Cole, as trustees of the Lecil E. and Mary Jeanette Cole Revocable Trust dated October 19, 1993 (the "Cole Trust") (collectively, the "Sellers"), have entered into an Acquisition Agreement, dated May 19, 2008 (the "Acquisition Agreement"), which sets forth the terms and conditions pursuant to which Calavo purchased all of the outstanding shares of Hawaiian Sweet, Inc. ("HS") and all ownership interests of Hawaiian Pride, LLC ("HP"). HS and HP engage in tropical-product packing and processing operations in Hawaii. The Acquisition Agreement provides, among other things, that as a result of the Acquisition Agreement, Calavo shall make an initial purchase price payment in the aggregate amount of $3,500,000 for both entities. Calavo made the initial payment on May 20, 2008. Calavo shall also make two additional annual payments, ranging from $2,500,000 to $4,500,000, based on certain operating results (the "Earn-Out Payment(s)"), as defined. Mr. Cole is President, Chief Executive Officer, and Chairman of the Board of Directors of Calavo. Pursuant to SFAS 141, Business Combinations, we recorded approximately $7.7 million as a liability related to deferred and contingent consideration to the Sellers, of which $3.9 million is recorded in accrued expenses and $3.8 million is recorded in long-term obligations, less current portion.
The first Earn-Out Payment to be made by Calavo will be adjusted if the aggregate working capital ("WC") of HS and HP does not equal $700,000 as of the closing date. In the event that WC is less than $700,000, Calavo shall reduce its first Earn-Out payment by an amount equal to the difference between $700,000 and the closing date aggregate working capital of HS and HP. In the event that WC is greater than $700,000, Calavo shall increase its first Earn-Out payment by an amount equal to the difference between $700,000 and the closing date aggregate working capital of HS and HP.
Pursuant to the Acquisition Agreement, the transaction closed on May 30, 2008.
Concurrently with the execution of the Acquisition Agreement, Calavo and the Cole Trust have entered into an Agreement and Escrow Instructions for Purchase and Sale of Real Property (the "Real Estate Contract"), dated the same date as the acquisition agreement, pursuant to which Calavo purchased from the Cole Trust approximately 727 acres of agricultural land located in Pahoa, Hawaii for a purchase price of $1,500,000, which Calavo delivered on May 19, 2008. The Real Estate Contract also closed on May 30, 2008.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands). We obtained third-party valuations for the long-term assets acquired.

                                At May 30, 2008

                   Current assets                     $  1,498
                   Property, plant, and equipment       10,947
                   Intangible assets                     1,310

                   Total assets acquired                13,755

                   Current liabilities                    (809 )

                   Net assets acquired                  12,946
                   Deferred consideration               (4,709 )

                   Contingent consideration             (3,012 )

                   Net cash paid as of May 30, 2008   $  5,225

Of the $1,310,000 of intangible assets, $1,140,000 was assigned to customer contract/relationships with a weighted average life of 8 years, $100,000 to trade names with an average life of 8 years and $70,000 to non-competition agreements with an average life of 3 years.

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Net Sales
   The following table summarizes our net sales by business segment for each of
the three and nine month periods ended July 31, 2008 and 2007:

                                   Three months ended July 31,                         Nine months ended July 31,
(in thousands)                2008              Change           2007             2008           Change           2007

Net sales to
third-parties:
Fresh products             $    84,828              6.7 %      $ 79,467        $  234,911           25.3 %      $ 187,547
Processed products              12,075              2.0 %        11,840            33,010            9.5 %         30,153

Total net sales            $    96,903              6.1 %      $ 91,307        $  267,921           23.1 %      $ 217,700


As a percentage of
net sales:
Fresh products                    87.5 %                           87.0 %            87.7 %                          86.1 %
Processed products                12.5 %                           13.0 %            12.3 %                          13.9 %

                                 100.0 %                          100.0 %           100.0 %                         100.0 %

Net sales for the third quarter of fiscal 2008, compared to fiscal 2007, increased by $5.6 million, or 6.1%; whereas net sales for the nine months ended July 31, 2008, compared to fiscal 2007, increased by $50.2 million, or 23.1%. The increase in fresh product sales during the third quarter of fiscal 2008 was primarily related to increased sales in California sourced avocados, as well as increased sales from tomatoes and pineapples, partially offset by decreased sales in Mexican sourced avocados. The increase in fresh product sales during the nine months ended July 31, 2008 was primarily driven by increased sales related to California and Mexican sourced avocados, as well as increased tomato and pineapple sales. While the procurement of fresh avocados related to our fresh products segment is seasonal, our processed products business is generally not subject to a seasonal effect. For the related three and nine-month periods, the increase in net sales delivered by our processed products business was due primarily to an increase in total pounds of product sold and/or an increase in the net sales price.
Net sales to third parties by segment exclude value-added services billed by our Uruapan packinghouse and our Uruapan processing plant to the parent company. All intercompany sales are eliminated in our consolidated results of operations. Fresh products
Net sales delivered by the fresh products business increased by approximately $5.4 million, or 6.7%, for the third quarter of fiscal 2008, when compared to the same period for fiscal 2007. This increase was primarily related to increased sales in California sourced avocados, as well as increased sales from tomatoes and pineapples, partially offset by decreased sales in Mexican sourced avocados.
California sourced avocado sales reflect a 7.5% increase in pounds of avocados sold, when compared to the same prior year period. This increase in pounds is primarily related to: (1) the timing of the delivery to the U.S. marketplace and (2) the expected increase in the overall harvest of the California avocado crop for the 2007/2008 season. Paradoxically, our market share of California avocados decreased to 27.3% in the third quarter of fiscal 2008, when compared to a 29.5% market share for the same prior year period. We believe this decrease is primarily related to a shift in the current year volume to growing areas where we do not command as significant a market share. The average selling price, on a per carton basis, of California avocados sold increased approximately 9.1% when compared to the same prior year period. We attribute some of this increase to the lower overall volume of avocados in the marketplace.
The volume of tomatoes and pineapples increased by approximately 0.2 million and 0.4 million cartons, or 174.4% and 100.0%, for our third fiscal quarter of 2008 when compared to the same prior year period. These increases were primarily related to improvements to the infrastructure/growing areas in fiscal 2008 (for the

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tomatoes) and the new consignment and marketing agreement with Maui Pineapple Company, LTD (for the pineapples). Additionally, the average selling price, on a per carton basis, of tomatoes increased approximately 27.1% when compared to the same prior year period. We attribute some of this increase to increased demand for tomatoes in the U.S. marketplace.
Partially offsetting such increases, however, was a decrease in sales related to Mexican sourced avocados. For the 3rd fiscal quarter of 2008, as compared to the same prior period, the volume of Mexican fruit sold decreased by approximately 9.3 million pounds, or 36.7%. However, average selling prices, on a per carton basis, of Mexican avocados sold increased approximately 13.7%, when compared to the same prior year period. As discussed above, we attribute some of this increase in selling price to the lower overall volume of avocados in the marketplace. The decrease in pounds is primarily related to the expected, and, ultimately realized, smaller avocado crop in Mexico. Net sales delivered by the business increased by approximately $50.2 million, or 23.1%, for the nine months ended July 31, 2008, when compared to the same period for fiscal 2007. This increase was primarily driven by increased sales related to California and Mexican sourced avocados, increased tomato and pineapple sales, partially offset by decreased sales related to avocados sourced from Chile.
The average selling price, on a per carton basis, of Mexican avocados sold increased approximately 28.5% when compared to the same nine-month prior period. As discussed above, we attribute some of this increase to increased demand for avocados in the U.S. marketplace. Partially offsetting such increase, however, was a decrease in the volume of Mexican fruit sold, which decreased by approximately 6.7 million pounds, or 7.3%, when compared to the same nine-month prior period. The decrease in pounds was primarily related to the expected, and, ultimately realized, smaller avocado crop in Mexico. California avocados sales reflect a 2.6% decrease in pounds of avocados sold, when compared to the same nine-month prior period. The decrease in pounds is primarily related to timing of the delivery to the U.S. marketplace, partially offset by the expected increase in the overall harvest of the California avocado crop for the 2008/2007 season. Our market share of California avocados decreased to 26.9% for the nine month period ending July 31, 2008, when compared to a 31.6% market share for the same prior year period. As discussed above, we believe this decrease is primarily related to a shift in the current year volume to growing areas where we do not command as significant a market share. The average selling price, on a per carton basis, of California avocados sold, however, increased approximately 17.9% when compared to the same prior year period. We attribute some of this increase to the lower overall volume of avocados in the marketplace.
The volume of tomatoes and pineapples increased by approximately 0.7 million and 1.3 million cartons, or 57.5% and 99.9%, when compared to the same nine-month prior period. These increases were primarily related to improvements to the Agricola Belher infrastructure/growing areas in fiscal 2008 (for the tomatoes) and the consignment and marketing agreement with Maui Pineapple Company, LTD (for the pineapples). Additionally, the average selling price, on a per carton basis, of tomatoes increased approximately 38.7% when compared to the same prior year period. We attribute some of this increase to increased demand for tomatoes in the U.S. marketplace.
We anticipate that net sales related to California sourced avocados, as well as tomatoes, to experience a seasonal decrease during our fourth fiscal quarter of 2008, as compared to the third fiscal quarter of 2008. We anticipate that net sales related to non-California sourced avocados to experience a seasonal increase in the fourth fiscal quarter of 2008, as compared to the third fiscal quarter of 2008.

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Processed products
For the quarter ended July 31, 2008, when compared to the same period for fiscal 2007, net sales increased by approximately $0.2 million, or 2.0%. This increase is primarily related to a 14.1% increase in the average net selling price per pound during our third quarter of 2008, when compared to the same prior year period. Such increase was partially offset, however, by a 10.3% decrease in total pounds sold. The decrease in pounds sold primarily relates to a decrease in the sale of our food-service guacamole products, partially offset by an increase in retail guacamole products. The increase in the average net selling price was primarily related to a change in the sales mix, whereby we decreased the volume of certain lower net selling price items and/or increased the volume of higher net selling price items.
For the first nine-months ended July 31, 2008, when compared to the same period for fiscal 2007, net sales increased by approximately $2.9 million, or 9.5%. This increase is primarily related to a 2.3% increase in total pounds sold, as well as a 7.1% increase in the average net selling price per pound for our first nine-months of 2008 when compared to the same prior year period. The increase in pounds sold primarily relates to an increase in the sale of our retail guacamole products, partially offset by a decrease in the sale of our foodservice guacamole products. The increase in the average net selling price was primarily related to a change in the sales mix, whereby we decreased the volume of certain lower net selling price items and/or increased the volume of higher net selling price items.
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, 2008 and 2007:

                                      Three months ended July 31,                      Nine months ended July 31,
(in thousands)                   2008            Change           2007            2008           Change            2007

Gross margins:
Fresh products                 $   6,158            (5.3 %)      $ 6,503        $  14,233          (13.4 %)      $ 16,443
Processed products                 1,534           (27.8 %)        2,124            6,782          (17.9 %)         8,259

Total gross margins            $   7,692           (10.8 %)      $ 8,627        $  21,015          (14.9 %)      $ 24,702

Gross profit percentages:
Fresh products                       7.3 %                           8.2 %            6.1 %                           8.8 %
Processed products                  12.7 %                          17.9 %           20.5 %                          27.4 %
Consolidated                         7.9 %                           9.4 %            7.8 %                          11.3 %

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 decreased by approximately $0.9 million, or 10.8%, and $3.7 million, or 14.9%, for the third quarter and first nine months of fiscal 2008, when compared to the same periods for fiscal 2007. These decreases were primarily attributable to gross margin deterioration in both our fresh products and processed products segments.
For the third quarter and first nine months of fiscal 2008, as compared to the same prior year periods, gross margins related to our fresh products segment decreased. Such decreases were primarily driven by a significant increase in Mexican fruit costs. For the third quarter and first nine months of fiscal 2008, we experienced a 27.0% and a 55.6% increase in the average fruit cost for Mexican sourced avocados. Such higher fruit costs were partially offset, however, by corresponding increases in the average sales prices of Mexican avocados. For the third quarter and first nine months of fiscal 2008, we experienced a 13.7% and 28.5% increase in the average sales price of Mexican sourced avocados. The significant increase in tomato volume, as well as the increase in the average net sales price for tomatoes, also positively impacted gross margins. Tomato sales volume increased 174.4% and 57.5% for the three and nine month periods ending July 31, 2008 when compared to the same prior period. Additionally,

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the average net sales price for tomatoes increased 27.1% and 38.7% for the three and nine month periods ending July 31, 2008 when compared to the same prior period.
The processed products gross profit percentages for the first three and nine months of fiscal 2008, when compared to the same prior year period, decreased primarily as a result of higher Mexican fruit costs. Such was partially offset, however, by an increase in total pounds sold, and/or a shift in the sales mix to more profitable products. We anticipate that the gross profit percentage for our processed product segment will continue to experience significant fluctuations during the next fiscal quarter primarily due to the uncertainty of the cost of fruit that will be used in the production process. Selling, General and Administrative

                                  Three months ended July 31,                        Nine months ended July 31,
(in thousands)                2008            Change          2007             2008              Change           2007

Selling, general and
administrative             $    5,301            10.4 %      $ 4,803        $    14,752              4.2 %      $ 14,162
Percentage of net
sales                             5.5 %                          5.3 %              5.5 %                            6.5 %

Selling, general and administrative expenses include costs of marketing and advertising, sales expenses and other general and administrative costs. Selling, general and administrative expenses increased $0.5 million, or 10.4%, for the three months ended July 31, 2008, when compared to the same period for fiscal 2007. This increase was primarily related to higher corporate costs, including, but not limited to, employee compensation costs (totaling approximately $0.2 million), advertising expense (totaling approximately $0.1 million), audit/SOX fees (totaling approximately $0.2 million) and broker commissions (totaling approximately $0.2 million). Such increases were partially offset, however, by lower bonus expense (totaling approximately $0.2 million).
Selling, general and administrative expenses increased $0.6 million, or 4.2%, for the nine months ended July 31, 2008, when compared to the same period for fiscal 2007. This increase was primarily related to higher corporate costs, including, but not limited to, employee compensation costs (totaling approximately $0.6 million), broker commissions (totaling approximately $0.4 million) and maintenance and repair expenses (totaling approximately $0.2 million). Such increases were partially offset, however, by lower bonus expense (totaling approximately $0.6 million).

Other Income, net

                                    Three months ended July 31,                       Nine months ended July 31,
(in thousands)                 2008             Change            2007           2008             Change           2007

Other income, net            $    248               264.7 %      $   68        $    907               98.9 %      $  456
Percentage of net sales           0.3 %                             0.1 %           0.3 %                            0.2 %

Other income, net, includes interest income and expense generated in connection with our financing and operating activities, as well as certain other transactions that are outside of the course of normal operations. For the three and nine-months months ended July 31, 2008, other income, net, includes dividend income of $0.1 million and $0.2 million from Limoneira Company. For the three and nine months ended July 31, 2008, other income, net, includes $0.1 million and $0.2 million of income from Maui Fresh, LLC.

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Provision for Income Taxes

                                     Three months ended July 31,                         Nine months ended July 31,
(in thousands)                 2008            Change            2007              2008            Change            2007

Provision for income
taxes                        $   884            (34.8 %)       $ 1,355          $  2,377            (38.4 %)       $ 3,860
Percentage of income
before provision for
income taxes                    38.9 %                            37.9 %            38.9 %                            38.6 %

For the first nine months of fiscal 2008, our provision for income taxes was $2.4 million, as compared to $3.9 million recorded for the comparable prior year period. We expect our effective tax rate to approximate 38.9% during fiscal 2008.
Liquidity and Capital Resources
Cash provided by operating activities was $7.7 million for the nine months ended July 31, 2008, compared to $0.3 million for the similar period in fiscal 2007. Operating cash flows for the nine months ended July 31, 2008 reflect our net income of $3.7 million, net non-cash items (depreciation and amortization, stock compensation expense, and income from Maui Fresh, LLC) of $1.8 million and a net increase in the noncash components of our working capital of approximately $2.2 million.
These working capital increases include an increase in payable to growers of $12.5 million, an increase in trade accounts payable and accrued expenses of $2.0 million, a decrease in income tax receivable of $1.7 million, a decrease in prepaid expenses and other current assets of $0.5 million, a decrease in advances to suppliers of $0.5 million, and an increase in income tax payable of $0.4 million. These increases were partially offset by an increase in accounts receivable of $7.8 million and an increase in inventory of $7.6 million.
The increase in payable to growers is primarily related to an increase in California fruit delivered in the month of July 2008, as compared to October 2007. The increase in trade accounts payable and accrued expenses primarily reflects the current payable related to our acquisition of Hawaiian Sweet and Hawaiian Pride, as well as an increase in payables to foreign tomato and pineapple suppliers as of July 2008, as compared to October 2007. The decrease in income tax receivable primarily relates to income from operations through the nine months ended July 31, 2008. The increase in our accounts receivable balance, as of July 31, 2008, when compared to October 31, 2007, primarily reflects higher sales recorded in the month of July 2008, as compared to October 2007. The increase in inventory is primarily related to an increase in California fruit delivered in the month of July 2008, as compared to October 2007, and an increase in processed guacamole products.
Cash used in investing activities was $6.5 million for the nine months ended July 31, 2008 and related principally to the acquisition of Hawaiian Sweet and Hawaiian Pride of $5.0 million (see note 8 to the condensed, consolidated financial statements) and the purchase of property, plant and equipment items of $1.7 million.
Cash used in financing activities was $1.9 million for the nine months ended July 31, 2008, which related principally to the payment of a $5.0 million dividend, as well as payments on long-term obligations totaling $1.3 million. Such proceeds were partially offset, however, by proceeds from borrowings on our lines of credit totaling $4.2 million.
Our principal sources of liquidity are our existing cash reserves, cash generated from operations and amounts available for borrowing under our existing credit facilities. Cash and cash equivalents as of July 31, 2008 and October 31, 2007 totaled $0.3 million and $1.0 million. Our working capital at July 31, 2008 was $16.3 million, compared to $16.3 million at October 31, 2007. Our working capital remained consistent from October 31, 2007.
We believe that cash flows from operations and available credit facilities will be sufficient to satisfy our future capital expenditures, grower . . .