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, 2008 of Calavo Growers, Inc. (we, Calavo, or the Company).
Recent Developments
Dividend payment
On December 23, 2008 we paid a $0.35 per share dividend in the aggregate amount of $5.0 million to shareholders of record on December 9, 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. In the second quarter of 2009, we won our most recent appeal case for the tax year ended December 31, 2000. The Hacienda, however, is expected to appeal that decision.
In the second quarter of 2009, the Hacienda initiated an examination related to tax year ended December 31, 2007 as well. Based on our success from the most recent appeal case, 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 in the financial statements as of April 30, 2009. We pledged our processed products building located in Uruapan, Michoacan, Mexico as collateral to the Hacienda in regards to this assessment.
IRS examination - The Internal Revenue Service has concluded their examination for the year ended October 31, 2005. No changes noted.
From time to time, we are also involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.

Net Sales
   The following table summarizes our net sales by business segment for each of
the three and six month periods ended April 30, 2009 and 2008:

                                  Three months ended April 30,                        Six months ended April 30,
(in thousands)                2009            Change            2008            2009           Change            2008

Net sales to
third-parties:
Fresh products             $   76,040           (13.9 )%      $ 88,323        $ 136,199           (9.3 )%      $ 150,083
Processed products             10,789             3.2 %         10,454           21,277            1.6 %          20,935

Total net sales            $   86,829           (12.1 )%      $ 98,777        $ 157,476           (7.9 )%      $ 171,018


As a percentage of
net sales:
Fresh products                   87.6 %                           89.4 %           86.5 %                           87.8 %
Processed products               12.4 %                           10.6 %           13.5 %                           12.2 %

                                100.0 %                          100.0 %          100.0 %                          100.0 %

Overview
Net sales for the second quarter of fiscal 2009, compared to fiscal 2008, decreased by $11.9 million, or 12.1%; whereas net sales for the six months ended April 30, 2009, compared to fiscal 2008, decreased by $13.5 million, or 7.9%. The decrease in fresh product sales during the three and six-month periods of fiscal 2009 was primarily related to decreased sales of California and Chilean sourced avocados, as well as tomatoes and pineapples. These decreases were partially offset, however, by increased sales from Mexican sourced avocados. 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 six-month periods, the increase in net sales delivered by our processed products business was due primarily to an increase in the per unit, 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. Intercompany sales are eliminated in our consolidated results of operations. Fresh products
Second Quarter 2009 vs. Second Quarter 2008 Net sales delivered by the fresh products business decreased by approximately $12.3 million, or 13.9%, for the second quarter of fiscal 2009, when compared to the same period for fiscal 2008. As discussed above, this decrease in fresh product sales during the second quarter of fiscal 2009 was primarily related to decreased sales of California and Chilean sourced avocados (due to the decrease in size of the California and Chilean avocado crop for 2008/2009 due primarily to poor weather conditions), as well as tomatoes (the increase in units sold was offset by the decrease in sales price due to high volume) and pineapples (decrease in pounds sold). These decreases were partially offset, however, by increased sales from Mexican sourced avocados.
California sourced avocado sales reflect a 50.2% decrease in pounds of avocados sold, for the second quarter of 2009, when compared to the same prior year period. This decrease in pounds sold is primarily related to five to seven consecutive days of 100-degree weather in June 2008, which damaged the fruit that was just beginning to mature on the trees. Our market share of California avocados increased to 30.0% for second quarter of 2009, when compared to a 26.1% market share for the same prior year period. The average selling price, on a per carton basis, of California avocados sold increased approximately 4.7% when compared to the same prior year period. We attribute some of this increase to the lower overall volume of avocados in the marketplace.

Sales of Chilean sourced avocados decreased $2.2 million, or 96.9%, for the second quarter of 2009, when compared to the same prior year period. This decrease was primarily related to the decrease in the volume of Chilean fruit sold. This decrease was primarily related to the significantly smaller size of the Chilean avocado crop.
Sales of tomatoes decreased $2.4 million, or 21.7%, for the second quarter of fiscal 2009, when compared to the same period for fiscal 2008. The decrease in sales for tomatoes is primarily due to the decrease in the average carton selling price by 35.7%. This was partially offset by an increase in the volume of tomatoes by approximately 0.2 million cartons, or 17.6%, when compared to the same prior year period. We attribute most of this decrease in the per carton selling price to the volume of tomatoes in the U.S. marketplace.
Sales of pineapples decreased $1.6 million, or 33.1%, for the second quarter of fiscal 2009, when compared to the same period year period for fiscal 2008. The decrease in sales for pineapples is primarily due to the decrease in the units sold by 42.8%. This was partially offset by an increase in the average sales price by 17.7%, when compared to the same prior year period.
Partially offsetting such decreases was an increase in sales of Mexican sourced avocados, which increased $5.5 million, or 11.8%, for the second quarter of 2009, when compared to the same prior year period. The increase in Mexican sourced avocados was primarily related to an increase in the volume of Mexican fruit sold of 11.4 million pounds, or 34.7%, when compared to the same prior year period. We attribute some of this increase to the large Mexican avocado crop for fiscal 2009. Such increase was partially offset, however, by a decrease in the average selling price per carton of Mexican avocados, which decreased approximately 17.6% when compared to the same prior year period. We attribute much of this decrease on the realized and expected size of the Mexican avocado crop.
Six Months Ended 2009 vs. Six Months Ended 2008 Net sales delivered by the business decreased by approximately $13.9 million, or 9.3%, for the six months ended April 30, 2009, when compared to the same prior year period for fiscal 2008. This decrease was primarily driven by decreased sales of California and Chilean sourced avocados, as well as tomatoes, partially offset by increased sales related to avocados sourced from Mexico. California sourced avocado sales reflect a 45.6% decrease in pounds of avocados sold, when compared to the same six-month prior period. This decrease in pounds sold is primarily related to five to seven consecutive days of 100-degree weather in June 2008, which damaged the fruit that was just beginning to mature on the trees. The average selling price, on a per carton basis, of California avocados sold increased approximately 2.5% when compared to the same prior year period. We attribute some of this increase to the lower overall volume of avocados in the marketplace.
Sales of Chilean sourced avocados decreased $4.4 million, or 69.9%, when compared to the same six-month prior period. This decrease was primarily related to the decrease in the volume of Chilean fruit sold. This decrease was primarily related to the significantly smaller size of the Chilean avocado crop.
Sales of tomatoes decreased $4.5 million, or 26.3%, when compared to the same six-month prior period. The decrease in sales for tomatoes is primarily due to the decrease in the average carton selling price by 42.8%. This was partially offset by an increase in the volume of tomatoes by approximately 0.5 million cartons, or 28.6%, when compared to the same prior year period. We attribute some of this decrease in the per carton selling price to the volume of tomatoes in the U.S. marketplace.
Partially offsetting such decreases was an increase in sales of Mexican sourced avocados, which increased $6.1 million, or 6.4%, for the six month period ending April 30, 2009, when compared to the same prior year period. The increase in Mexican sourced avocados was primarily related to an increase in the volume of Mexican fruit sold of 21.2 million pounds, or 30.9%, when compared to the same prior year period. We attribute some of this increase to

the large Mexican avocado crop for fiscal 2009. Such increase was partially offset, however, by a decrease in the average carton selling price of Mexican avocados, which decreased approximately 22.9% when compared to the same prior year period. We attribute much of this decrease on the realized and expected size of the Mexican avocado crop.
We anticipate that net sales related to California sourced avocados, as well as pineapples, to experience a seasonal increase during our third fiscal quarter of 2009, as compared to the second fiscal quarter of 2009.
We anticipate that net sales related to non-California sourced avocados, as well as tomatoes, to experience a seasonal decrease in the third fiscal quarter of 2009, as compared to the second fiscal quarter of 2009. Processed products
Second Quarter 2009 vs. Second Quarter 2008 For the quarter ended April 30, 2009, when compared to the same period for fiscal 2008, net sales increased by approximately $0.3 million, or 3.2%. This increase is primarily related to a 2.5% increase in total pounds sold during our second quarter of 2009, when compared to the same prior year period. The average net selling price per pound stayed relatively consistent compared to prior year.
Six Months Ended 2009 vs. Six Months Ended 2008 For the first six-months ended April 30, 2009, when compared to the same period for fiscal 2008, net sales increased by approximately $0.3 million, or 1.6%. This increase is primary related to the increase in the average net sales prices of 6.9%, partially offset by a decrease in pounds sold of 5.7%. The decrease in pounds sold primarily related to a decrease in the sales of our frozen guacamole product, which decreased approximately 11.9%, but was partially offset by an increase in the pounds sold of our high-pressure guacamole products, which increased approximately 4.2% when compared to the same prior year period.
Based primarily on the slowing economy in the United States, we believe that retail sales, as a percentage of total net processed product sales, may increase in the future.
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, 2009 and 2008:

                                      Three months ended April 30,                      Six months ended April 30,
(in thousands)                    2009             Change          2008             2009           Change           2008

Gross margins:
Fresh products                 $     9,024            94.3 %      $ 4,644        $   17,813          120.6 %      $  8,075
Processed products                   3,915            47.7 %        2,650             7,585           44.5 %         5,248

Total gross margins            $    12,939            77.4 %      $ 7,294        $   25,398           90.6 %      $ 13,323

Gross profit percentages:
Fresh products                        11.9 %                          5.3 %            13.1 %                          5.4 %
Processed products                    36.3 %                         25.3 %            35.6 %                         25.1 %
Consolidated                          14.9 %                          7.4 %            16.1 %                          7.8 %

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 $5.6 million, or 77.4%, and $12.1 million, or 90.6%, for the second quarter and first six months of fiscal 2009, when compared to the same periods for fiscal 2008. These increases were attributable to improvements in both our fresh products and our processed products segment.

During the related three and six-month periods of fiscal 2009, as compared to the same prior year periods, the increase in our fresh products segment gross margin percentage was primarily related to a significant decrease in fruit costs for Mexican sourced avocados, as well as a decrease in substantially all operating costs related to our Mexican operations. These decreases are primarily related to the anticipated and realized large Mexican avocado crop, as well as the considerable strengthening of the U.S. Dollar compared to the Mexican Peso. Additionally, during our second quarter of 2009 and the six months period of fiscal 2009, when compared to the prior year periods, we experienced an increase in the volume of Mexican sourced avocados sold by 11.4 million pounds or 34.7% and 21.2 million pounds or 30.9%. Combined, these had the effect of decreasing our per pound costs, which, as a result, positively impacted gross margins. For the related three and six month periods of fiscal 2009, these decreases were partially offset by a decrease in per carton sales prices for Mexican avocados of 17.6% and 22.9%.
The processed products gross profit percentages for the three and six month periods of fiscal 2009, 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. As discussed above, the anticipated large Mexican avocado crop, as well as the considerable strengthening of the U.S. Dollar compared to the Mexican Peso, significantly decreased our per pound costs. Selling, General and Administrative

                                     Three months ended April 30,                         Six months ended April 30,
(in thousands)                  2009             Change           2008              2009             Change           2008

Selling, general and
administrative               $   5,535            17.7 %        $ 4,701          $  10,835            14.7 %        $ 9,451
Percentage of net
sales                              6.4 %                            4.8 %              6.9 %                            5.5 %

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 $0.8 million, or 17.7%, for the three months ended April 30, 2009, when compared to the same period for fiscal 2008. This increase was primarily related to higher corporate costs, including, but not limited to, management bonuses (totaling approximately $0.5 million), salaries and benefits (totaling approximately $0.2 million), and general insurance (totaling approximately $0.1 million).
Selling, general and administrative expenses increased $1.4 million, or 14.7%, for the six months ended April 30, 2009, when compared to the same period for fiscal 2008. This increase was primarily related to higher corporate costs, including, but not limited to, management bonuses (totaling approximately $0.7 million), salaries and benefits (totaling approximately $0.5 million), general insurance (totaling approximately $0.1 million) and bad debt expense (totaling approximately $0.1 million).

Other Income, net

                                     Three months ended April 30,                        Six months ended April 30,
(in thousands)                  2009             Change            2008            2009             Change           2008

Other income, net             $   366              (8.0 )%        $ 398          $   621              (5.8 )%       $ 659

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 six months ended April 30, 2009, other income, net, includes dividend income of $0.1 million from Limoneira Company. For the three and six months ended April 30, 2009, other income, net, includes $0.1 million and $0.2 million of income from Maui Fresh, LLC.

Provision for Income Taxes

                                     Three months ended April 30,                          Six months ended April 30,
(in thousands)                  2009             Change            2008              2009            Change            2008

Provision for income
taxes                        $   3,017            192.1 %        $ 1,033          $  5,725            283.5 %        $ 1,493
Percentage of income
before provision for
income taxes                      40.3 %                            39.1 %            39.3 %                            38.9 %

For the second quarter of fiscal 2009, our provision for income taxes was $3.0 million, as compared to $1.0 million recorded for the comparable prior year period.
For the first six months of fiscal 2009, our provision for income taxes was $5.7 million, as compared to $1.5 million recorded for the comparable prior year period. We expect our effective tax rate to approximate 39% during fiscal 2009. Liquidity and Capital Resources
Cash provided by operating activities was $13.7 million for the six months ended April 30, 2009, compared to $1.3 million used in operations for the similar period in fiscal 2008. Operating cash flows for the six months ended April 30, 2009 reflect our net income of $8.8 million, net non-cash charges (depreciation and amortization, stock compensation expense, provision for losses on accounts receivable, interest on deferred consideration, and income from Maui, LLC) of $1.5 million and a net increase in the noncash components of our operating capital of approximately $3.4 million.
Our operating capital increase includes a net increase in trade accounts payable and accrued expenses of $15.8 million, an increase in income tax payable of $2.9 million, and an increase in payable to growers of $3.8 million, partially offset by an increase in accounts receivable of $9.1 million, an increase in advances to suppliers of $8.4 million, an increase in prepaid expenses and other current assets of $0.9 million and an increase in inventory of $0.7 million.
The increase in our advances to suppliers, as of April 30, 2009, when compared to October 31, 2008, primarily reflects advances made to Agricola Belher related to the receipt of tomatoes. The increase in payable to our growers primarily reflects an increase in California fruit delivered in the month of April 2009, as compared to the month of October 2008. The increase in inventory is primarily related to an increase in the fresh fruit on hand at April 30, 2009. This was primarily driven by more fruit being delivered for California sourced avocados in the month of April 2009. The decrease in income tax receivable and the increase in income tax payable primarily relates to income from operations through the six months ended April 30, 2009.
Cash used in investing activities was $1.7 million for the six months ended April 30, 2009 and related principally to the purchase of property, plant and equipment items.
Cash used by financing activities was $8.5 million for the six months ended April 30, 2009, which related principally to the payment of our $5.0 million dividend, and $3.4 million in payments on our net borrowings on our lines of credit.
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 April 30, 2009 and October 31, 2008 totaled $5.0 million and $1.5 million. Our working capital at April 30, 2009 was $23.8 million, compared to $15.4 million at October 31, 2008.
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 2012 and July 2009. 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 $40 million, with a weighted-average interest rate of 2.5% and 4.8% at April 30, 2009 and October 31, 2008. Under these credit facilities, we had $19.7 million and $23.1 million outstanding as April 30, 2009 and October 31, 2008, of which $13.0 million was classified as a long-term liability as April 30, 2009 and October 31, 2008. These credit facilities contain 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 April 30, 2009. We are currently working with Bank of America to renew our line of credit and expect to complete such renewal before its expiration date.
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, 2008. For a summary of the contractual commitments at October 31, 2008, see Part II, Item 7, page 27 in our 2008 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.