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. (Calavo, the Company, we, us or our).
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 years 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 subsequently appealed that decision. We pledged our processed products building located in Uruapan, Michoacan, Mexico as collateral to the Hacienda in regards to these assessments.
In the second quarter of 2009, the Hacienda initiated an examination related to tax year ended December 31, 2007 as well. We are not aware of any assessments related to this examination, but we do not expect this examination to have a significant impact on our results of operations.
IRS examination- The Internal Revenue Service has concluded their examination for the year ended October 31, 2005. No changes were 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.
Term Revolving Credit Agreement
In July 2009, we renewed and extended our non-collateralized, revolving credit facility with Bank of America, N.A. Under the terms of this agreement, we are advanced funds for both working capital and long-term productive asset purchases. Total credit available under the borrowing agreement is now $15 million, up from $10 million and now expires on July 1, 2011. This increase was at our request and not due to any immediate cash flows needs. The credit facility contains various financial covenants, the most significant relating to working capital, tangible net worth (as defined), and Funded Debt to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) ratio (as defined). We were in compliance with all such covenants at July 31, 2009. First Earn-Out Payment
See footnote 8 to our condensed, consolidated financial statements for further explanation.

Net Sales
   The following table summarizes our net sales by business segment for each of
the three and nine month periods ended July 31, 2009 and 2008:

                                   Three months ended July 31,                        Nine months ended July 31,
(in thousands)                2009            Change            2008            2009           Change            2008
Net sales to
third-parties:
Fresh products             $    94,727           11.7 %       $ 84,828        $ 230,926           (1.7 )%      $ 234,911
Processed products              11,620           (3.8 )%        12,075           32,897           (0.3 )%         33,010

Total net sales            $   106,347            9.7 %       $ 96,903        $ 263,823           (1.5 )%      $ 267,921


As a percentage of
net sales:
Fresh products                    89.1 %                          87.5 %           87.5 %                           87.7 %
Processed products                10.9 %                          12.5 %           12.5 %                           12.3 %

                                 100.0 %                         100.0 %          100.0 %                          100.0 %

Overview
Net sales for the third quarter of fiscal 2009, compared to fiscal 2008, increased by $9.4 million, or 9.7%; whereas net sales for the nine months ended July 31, 2009, compared to fiscal 2008, decreased by $4.1 million, or 1.5%. The increase in fresh product sales during the three-month periods of fiscal 2009 was primarily related to increased sales of Mexican and Chilean avocados, partially offset by a decrease in sales of California avocados, tomatoes, and pineapples. The decrease in fresh product sales during the nine-month periods of fiscal 2009 was primarily related to decreased sales of California and Chilean avocados, and tomatoes. 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 based on region, our processed products business is generally not subject to a seasonal effect. For the related three and nine-month periods, the slight decrease in net sales delivered by our processed products business was due primarily to a decrease in pounds sold.
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
Third Quarter 2009 vs. Third Quarter 2008 Net sales delivered by the fresh products business increased by approximately $9.9 million, or 11.7%, for the third quarter of fiscal 2009, when compared to the same period for fiscal 2008. As discussed above, this increase in fresh product sales during the third quarter of fiscal 2009 was primarily related to increased sales of Mexican and Chilean avocados, partially offset by a decrease in sales of California sourced avocados, as well as tomatoes and pineapples.
Sales of Mexican sourced avocados have increased $16.7 million, or 70.4%, for the third 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 12.5 million pounds, or 78.1%, 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 3.0% when compared to the same prior year period. We attribute much of this decrease on the size of the Mexican avocado crop.

Sales of Chilean sourced avocados increased $1.6 million for the third quarter of 2009, when compared to the same prior year period. This increase was primarily related to the increase in the volume of Chilean fruit sold for the quarter.
Partially offsetting such increases, however, was a decrease in sales of California sourced avocados of $7.2 million, or 13.9%. Sales reflect a 29.1% decrease in pounds of avocados sold, for the third quarter of 2009, when compared to the same prior year period. This decrease in pounds sold is primarily related to the corresponding decrease in the California avocado crop for fiscal 2008/2009. Such decrease is believed to be primarily related to poor weather conditions. Our market share of California avocados increased to 29.0% for third quarter of 2009, when compared to a 27.3% market share for the same prior year period. The average selling price, on a per carton basis, of California avocados sold increased approximately 24.3% when compared to the same prior year period. We attribute some of this increase to the lower overall volume of California avocados in the marketplace.
Sales of tomatoes decreased $1.1 million, or 45.9%, for the third 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 volume of tomatoes by approximately 0.1 million cartons, or 38.8%, in addition to the decrease in the average carton selling price by 9.2%, 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 $0.8 million, or 20.3%, for the third quarter of fiscal 2009, when compared to the same period for fiscal 2008. The decrease in sales for pineapples is primarily due to the decrease in the units sold by 12.6% and a decrease in the average sales price by 8.1%, when compared to the same prior year period.
Nine months Ended 2009 vs. Nine months Ended 2008 Net sales delivered by the business decreased by approximately $4.1 million, or 1.5%, for the nine months ended July 31, 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 35.0% decrease in pounds of avocados sold, when compared to the same nine-month prior period. As discussed above, this decrease in pounds sold is primarily related to the corresponding decrease in the California avocado crop for fiscal 2008/2009. Such decrease is believed to be primarily related to poor weather conditions. The average selling price, on a per carton basis, of California avocados sold increased approximately 19.0% when compared to the same prior year period. We attribute some of this increase to the lower overall volume of California avocados in the marketplace.
Sales of Chilean sourced avocados decreased $2.9 million, or 44.9%, when compared to the same nine-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 $5.5 million, or 28.5%, when compared to the same nine-month prior period. The decrease in sales for tomatoes is primarily due to the decrease in the average carton selling price by 38.6%. This was partially offset by an increase in the volume of tomatoes by approximately 0.3 million cartons, or 17.0%, 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 and the recession in the United States.
Partially offsetting such decreases was an increase in sales of Mexican sourced avocados, which increased $22.7 million, or 20.5%, for the nine month period ending July 31, 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 29.0 million pounds, or 34.2%, 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 17.0% when compared to the

same prior year period. We attribute some of this decrease to the higher overall volume of Mexican avocados in the marketplace.
We anticipate that net sales related to California sourced avocados to experience a seasonal decrease during our fourth fiscal quarter of 2009, as compared to the third fiscal quarter of 2009.
We anticipate that net sales related to non-California sourced avocados, as well as tomatoes, to experience a seasonal increase in the fourth fiscal quarter of 2009, as compared to the third fiscal quarter of 2009. Processed products
Third Quarter 2009 vs. Third Quarter 2008 For the quarter ended July 31, 2009, when compared to the same period for fiscal 2008, net sales decreased by approximately $0.5 million, or 3.8%. This decrease is primarily related to a 2.1% decrease in total pounds sold during our third quarter of 2009, when compared to the same prior year period. The average net selling price per pound decreased 2.4% from the corresponding prior year period. This decrease is primarily related to a change in sales mix, whereby certain lower-margin items decreased.
Nine months Ended 2009 vs. Nine months Ended 2008 For the first nine-months ended July 31, 2009, when compared to the same period for fiscal 2008, net sales stayed relatively consistent, decreasing only approximately $0.1 million, or 0.3%. This decrease is primary related to a decrease in pounds sold of 4.5%, offset by the increase in the average net sales prices of 4.6%. The decrease in pounds sold primarily relate to a decrease in the sales of our frozen guacamole products, which decreased approximately 8.2% when compared to the same prior year period and partially offset by our high-pressure guacamole, which increased approximately 0.9%. 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 nine month periods ended July 31, 2009 and 2008:

                                      Three months ended July 31,                       Nine months ended July 31,
(in thousands)                    2009            Change          2008             2009            Change           2008
Gross margins:
Fresh products                 $    6,408             4.1 %      $ 6,158        $   24,221            70.2 %      $ 14,233
Processed products                  3,498           128.0 %        1,534            11,083            63.4 %         6,782

Total gross margins            $    9,906            28.8 %      $ 7,692        $   35,304            68.0 %      $ 21,015

Gross profit percentages:
Fresh products                        6.8 %                          7.3 %            10.5 %                           6.1 %
Processed products                   30.1 %                         12.7 %            33.7 %                          20.5 %
Consolidated                          9.3 %                          7.9 %            13.4 %                           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 $2.2 million, or 28.8%, and $14.3 million, or 68.0%, for the third quarter and first nine 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 month period of fiscal 2009, as compared to the same prior year period, the decrease in our fresh products segment gross margin percentage was primarily related to a significant decrease in the volume of

California avocados sold, which decreased 29.1%. This decrease was primarily related to the smaller California avocado crop, as discussed above. This had the effect of increasing our per pound costs, which, as a result, negatively impacted gross margins. For the related three month period of fiscal 2009, this decrease was partially offset by an increase in per carton sales prices for California avocados, which increased 24.3%.
During the related nine month period of fiscal 2009, as compared to the same prior year period, 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 large Mexican avocado crop, as well as the considerable strengthening of the U.S. Dollar compared to the Mexican Peso. Additionally, during the nine month period of fiscal 2009, when compared to the prior year period, we experienced an increase in the volume of Mexican sourced avocados sold by 29.0 million pounds or 34.2%. Combined, these had the effect of decreasing our per pound costs, which, as a result, positively impacted gross margins. For the related nine month period of fiscal 2009, these decreases were partially offset by a decrease in per carton sales prices for Mexican avocados of 17.0%.
The processed products gross profit percentages for the three and nine 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 July 31,                         Nine months ended July 31,
(in thousands)                  2009            Change           2008              2009             Change            2008
Selling, general and
administrative               $   5,822            9.8 %        $ 5,301          $  16,657            12.9 %        $ 14,752
Percentage of net
sales                              5.5 %                           5.5 %              6.3 %                             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 $0.5 million, or 9.8%, for the three months ended July 31, 2009, when compared to the same period for fiscal 2008. This increase was primarily related to higher corporate costs, including, but not limited to, projected management bonuses (totaling approximately $0.7 million), and general insurance (totaling approximately $0.2 million). Such increases were partially offset, however, by lower broker commissions (totaling approximately $0.2 million), audit/SOX fees (totaling approximately $0.1 million) and bad debt expense (totaling approximately $0.1 million).
Selling, general and administrative expenses increased $1.9 million, or 12.9%, for the nine months ended July 31, 2009, when compared to the same period for fiscal 2008. This increase was primarily related to higher corporate costs, including, but not limited to, projected management bonuses (totaling approximately $1.5 million), salaries and benefits (totaling approximately $0.5 million), general insurance (totaling approximately $0.2 million) and employee benefits (totaling approximately $0.1 million). Such increases were partially offset, however, by lower broker commissions (totaling approximately $0.3 million), and maintenance and repair expense (totaling approximately $0.1 million).

Other Income, net

                               Three months ended July 31,             Nine months ended July 31,
(in thousands)               2009           Change       2008        2009           Change       2008
Other income, net          $   246            (0.8 )%   $ 248      $   867            (4.4 )%   $ 907
Percentage of net sales        0.2 %                      0.3 %        0.3 %                      0.3 %

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 nine months ended July 31, 2009, other income, net, includes dividend income of $0.1 million from Limoneira Company. For the three and nine months ended July 31, 2009, other income, net, includes $0.2 million and $0.4 million of income from Maui Fresh, LLC.

Provision for Income Taxes

                                     Three months ended July 31,                         Nine months ended July 31,
(in thousands)                  2009             Change           2008             2009            Change            2008
Provision for income
taxes                        $   1,597            80.7 %        $  884          $  7,322            208.0 %        $ 2,377
Percentage of income
before provision for
income taxes                      39.3 %                          38.9 %            39.3 %                            38.9 %

For the third quarter of fiscal 2009, our provision for income taxes was $1.6 million, as compared to $0.9 million recorded for the comparable prior year period.
For the first nine months of fiscal 2009, our provision for income taxes was $7.3 million, as compared to $2.4 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 $18.7 million for the nine months ended July 31, 2009, compared to $7.7 million provided by operations for the similar period in fiscal 2008. Operating cash flows for the nine months ended July 31, 2009 reflect our net income of $11.3 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 $2.2 million and a net increase in the noncash components of our operating capital of approximately $5.2 million.
Our operating capital increase includes a net increase in payable to growers of $11.3 million, an increase in trade accounts payable of $2.7 million, a decrease in advances to suppliers of $1.0 million and a decrease in income tax receivable of $0.4 million, partially offset by an increase in accounts receivable of $9.6 million, an increase in prepaid expenses and other current assets of $0.4 million, an increase in inventory of $0.1 million and an increase in other assets of $0.1 million.
The increase in payable to our growers primarily reflects an increase in California fruit delivered in the month of July 2009, as compared to the month of October 2008. The increase in trade accounts payable and accrued expenses primarily reflect the second Earn-Out payment that has been reclassed to a current liability. The increase in our accounts receivable balance, as of July 31, 2009, when compared to October 31, 2008, primarily reflects higher sales recorded in the month of July 2009, as compared to October 2008.
Cash used in investing activities was $4.1 million for the nine months ended July 31, 2009 and related principally to the purchase of property, plant and equipment items of $3.6 million, and collections from Belher of $0.5 million, partially offset by loan payments made to Belher of $1.0 million.

Cash used by financing activities was $14.0 million for the nine months ended July 31, 2009, which related principally to the payment of our $5.0 million dividend, $8.4 million in payments on our net borrowings on our lines of credit and $1.3 million payments on our long-term debt. Partially offsetting these payments, however, $0.7 million in cash was provided by the exercise of stock options.
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, 2009 and October 31, 2008 totaled $2.1 million and $1.5 million. Our working capital at July 31, 2009 was $16.7 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. Effective July 31, 2009, we entered into a new loan agreement with Bank of America, N.A. which increased our existing non-collateralized, revolving credit facility to $15 million, from $10 million. This new agreement expires July 1, 2011. Our non-collateralized, revolving credit facilities with Farm Credit West, PCA expires in February 2012. 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 $45 million, with a weighted-average interest rate of 2.5% and 4.8% at July 31, 2009 and October 31, 2008. Under these credit facilities, we had $14.7 million and $23.1 million outstanding as July 31, 2009 and October 31, 2008, of which $6.5 million and $13.0 million was classified as a long-term liability as July 31, 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 July 31, 2009.
Contractual Obligations
The following table summarizes contractual obligations pursuant to which we are required to make cash payments. The information is presented as of our fiscal year ended July 31, 2009:

                                                                                  Payments due by period
Contractual Obligations                      Total           Less than 1 year          1-3 years          3-5 years          More than 5 years
Long-term debt obligations (including
interest)                                   $ 20,938        $            5,137        $     3,760        $     9,754        $             2,287
Revolving credit facilities                    8,250                     8,250                  -                  -                          -
Defined benefit plan                             246                        44                 88                 88                         26
Operating lease commitments                    8,927                     1,083              1,841              1,716                      4,287

Total                                       $ 38,361        $           14,514        $     5,689        $    11,558        $             6,600

The California avocado industry is subject to a state marketing order whereby handlers are required to collect assessments from the growers and remit such assessments to the California Avocado Commission (CAC). The assessments are primarily for advertising and promotions. The amount of the assessment is based on the dollars paid to the growers for their fruit, and, as a result, is not determinable until the value of the payments to the growers has been calculated.
With similar precision, amounts remitted to the Hass Avocado Board (HAB) in connection with their assessment program, are likewise not determinable until the fruit is actually delivered to us. HAB assessments are primarily used to fund marketing and promotion efforts.

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