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CVGW > SEC Filings for CVGW > Form 10-Q on 11-Mar-2014All Recent SEC Filings

Show all filings for CALAVO GROWERS INC

Form 10-Q for CALAVO GROWERS INC


11-Mar-2014

Quarterly Report


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, 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.

Net Sales

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



                                             Three months ended January 31,
        (in thousands)                     2014           Change         2013
        Net sales to third-parties:
        Fresh products                  $    99,722          17.2 %    $  85,067
        Calavo Foods                         12,856           7.8 %       11,930
        RFG                                  55,587          30.8 %       42,502

        Total net sales                 $   168,165          20.5 %    $ 139,499

        As a percentage of net sales:
        Fresh products                         59.3 %                       60.9 %
        Calavo Foods                            7.6 %                        8.6 %
        RFG                                    33.1 %                       30.5 %

                                              100.0 %                      100.0 %

Net sales for the first quarter of fiscal 2014, compared to fiscal 2013, increased by $28.7 million, or 20.5%. The increase in sales, when compared to the same corresponding prior year period, is related to an increase in sales across all segments. We experienced an increase in RFG sales during the first quarter of fiscal 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 first quarter of fiscal 2014, which was due primarily to increased sales of Mexican and Chilean 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 first quarter of fiscal 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

Net sales delivered by the Fresh products business increased by approximately $14.7 million, or 17.2%, for the first quarter of fiscal 2014, when compared to the same period for fiscal 2013. As discussed above, this increase in Fresh product sales during the first quarter of fiscal 2014 was primarily related to increased sales of Mexican and Chilean sourced avocados. These increases were partially offset, however, by decreased sales from California sourced avocados. See details below.

Sales of Mexican sourced avocados increased $15.2 million, or 21.4% for the first quarter of 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 22.1%. We attribute this increase primarily to a lower overall volume of avocados in the marketplace, and an overall increase in the demand of avocados. Partially offsetting this increase, however, was a decrease in the pounds sold, which decreased by approximately 0.4 million pounds of avocados sold, or 0.5%, when compared to the same prior year period.

Sales of Chilean sourced avocados increased $1.5 million for the first quarter of 2014, when compared to the same prior year period. The increase in Chilean sourced avocados was due to an increased in pounds sold. Chilean sourced avocados sales reflect an increased in 1.4 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 $1.5 million, or 47.8% for the first 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 1.9 million pounds of avocados sold, or 57.1%, when compared to the same prior year period. We attribute most of this decrease in volume to the cyclically smaller California avocado crop expected for fiscal 2014. Partially offsetting this decrease, however, was the increase in the sales price per carton, which increased by approximately 21.5%. We attribute this increase primarily to a lower overall volume of avocados in the marketplace, and an overall increase in the demand of avocados.

Sales of tomatoes decreased $0.5 million, or 6.5%, for the first quarter of fiscal 2014, when compared to the same period for fiscal 2013. The decrease in sales for tomatoes is primarily due to a decrease in the number of cartons sold, partially offset by an increase in the per carton selling price. Both of these changes are primarily related to a decrease in grade 2 tomatoes being shipped to US marketplace in the first quarter of fiscal 2014, as compared to the same prior year period.

We anticipate that California avocado sales will experience an increase during our second fiscal quarter of 2014, as compared to the first quarter of 2014. Additionally, we believe that the sales volume of California grown avocados will decrease in second quarter of fiscal 2014, when compared to the same prior year period. This decrease is due to the aforementioned, expected, cyclically smaller avocado crop.

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


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Calavo Foods

Sales for Calavo Foods for the quarter ended January 31, 2014, when compared to the same period for fiscal 2013, increased $0.9 million, or 7.8%. This increase is due to an increase in sales of prepared guacamole products which increased approximately $1.1 million, or 10.2%, in the first quarter of fiscal year 2014, when compared to the same prior year period. Partially offsetting these increases, is a decrease of sales of Calavo Tortilla Chips of $0.1 million or 51.6% and Calavo Salsa Lisa products of $0.1 million or 19.4%. The increase in sales of prepared guacamole was primarily related to an increase in overall pounds sold, which increased 1.0 million pounds, or 20.8%, 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 6.4%.

RFG

Sales for RFG for the quarter ended January 31, 2014, when compared to the same period for fiscal 2013, increased $13.1 million, or 30.8%. This increase is due primarily to increased sales from packaged fresh cut fruit, packaged fresh cut vegetables and fresh prepared and packaged deli style salads, sandwiches and wraps. 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 29.6%. We believe the overall increase in sales volume is primarily due to an increase in demand for the variety of innovative packaged fresh food 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-month periods ended January 31, 2014 and
2013:



                                           Three months ended January 31,
           (in thousands)                 2014          Change          2013
           Gross margins:
           Fresh products              $    6,208          (8.3 )%    $  6,769
           Calavo Foods                     2,594         (16.0 )%       3,088
           RFG                              4,888          49.6 %        3,267

           Total gross margins         $   13,690           4.3 %     $ 13,124

           Gross profit percentages:
           Fresh products                     6.2 %                        8.0 %
           Calavo Foods                      20.2 %                       25.9 %
           RFG                                8.8 %                        7.7 %
           Consolidated                       8.1 %                        9.4 %

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 $0.6 million, or 4.3%, for the first quarter of fiscal 2014 when compared to the same period for fiscal 2013. This increase was primarily attributable to our RFG segment.

During our first fiscal quarter of 2014, as compared to the same prior year period, the decrease in our Fresh products segment gross margin percentage was primarily related to higher Mexican sourced avocado fruit costs year-over-year. We were able to increase the selling prices of Mexican sourced avocados, but not at the same rate at which fruit costs increased. The net effect of these negatively impacted gross margins. In addition, our gross margin percentage decreased further due to the decrease in pounds sold of California sourced avocados, compared to the same period in fiscal 2013. We attribute most of this decrease in volume to the cyclically smaller California avocado crop expected for fiscal 2014.


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The Calavo Foods segment gross margin percentage during our first fiscal quarter of 2014, when compared to the same prior year period, decreased primarily due an increase in the fruit cost per pound by approximately 24.7%. 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 a decrease in the production cost per pound by approximately 1.8%. Production costs per pound decreased due to an overall increase in the pounds produced in the first quarter of 2014, compared to the same prior year period. In addition, the strengthening of the U.S. Dollar compared to the Mexican Peso, decreased 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.

The RFG segment gross margin percentage during our first fiscal quarter of 2014, when compared to the same prior year period, increased primarily as a result of lower operating costs due to an overall increase in units of products produced. Sales for RFG for the quarter ended January 31, 2014, when compared to the same period for fiscal 2013, increased $13.1 million, or 30.8%. The increase in production to support such increase in sales had the effect of decreasing our per pound operating costs, which, as a result, positively impacted gross margins.

Selling, General and Administrative



                                                Three months ended January 31,
      (in thousands)                           2014           Change         2013
      Selling, general and administrative   $    8,272           (6.2 )%    $ 8,821
      Effective tax rate                           4.9 %                        5.2 %

Selling, general and administrative expenses include costs of marketing and advertising, sales expenses and other general and administrative costs. Selling, general and administrative expenses decreased $0.5 million, or 6.2%, for the three months ended January 31, 2014, when compared to the same period for fiscal 2013. This decrease was primarily to lower corporate costs, including, but not limited to, a revalue adjustment on contingent consideration related to the acquisition of RFG in the prior year, with none occurring in the current year (totaling approximately $1.2 million), and promotions and advertising (totaling approximately $0.1 million), partially offset by increases due to the start-up operations of FreshRealm (totaling approximately $0.5 million), salaries (totaling approximately $0.1 million), employee benefits (totaling approximately $0.1 million), and legal fees (totaling approximately $0.1 million).

Provision for Income Taxes



                                            Three months ended January 31,
          (in thousands)                  2014            Change         2013
          Provision for income taxes   $    1,822             20.8 %    $ 1,508
          Effective tax rate                 34.4 %                        36.0 %

For the first three months of fiscal 2014, our provision for income taxes was $1.8 million, as compared to $1.5 million for the comparable prior year period. We expect our effective tax rate to be approximately 34% during fiscal 2014. The expected lower tax rate, compared to prior year, is due to tax benefits related to the shift of income between tax jurisdictions and tax credits received through California's Enterprise Zone Hiring Credit Program and research and development. See Note 10 of the most recently filed 10-K for more information.


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Liquidity and Capital Resources

Cash used by operating activities was $6.6 million for the three months ended January 31, 2014, compared to $1.4 million provided by operations for the similar period in fiscal 2013. Operating cash flows for the three months ended January 31, 2014 reflect our net income of $3.5 million, net non-cash charges (depreciation and amortization, stock compensation expense, interest on deferred consideration, revalue adjustments on contingent consideration and income from unconsolidated entities) of $1.8 million and net of cash used in the components of our operating capital of approximately $11.9 million.

Cash used in operations caused by working capital changes, when compared to October 31, 2013, includes a net decrease in payable to growers of $9.8 million, a net increase in accounts receivable of $5.0 million, a net increase in prepaid and other current assets of $1.2 million, a net increase in advances to suppliers of $0.2 million, a net increase in other assets of $0.1 million, and a net increase in income tax receivable of $0.1 million, partially offset by, an increase in trade accounts payable and accrued expenses of $3.5 million, and a decrease in inventory of $1.0 million.

The decrease in our payable to growers primarily reflects a decrease in California fruit delivered in the month of January 2014, as compared to October 31, 2013. The increase in our accounts receivable, as of January 31, 2014, when compared to October 31, 2013, primarily reflects higher sales recorded in the month of January 2014, as compared to October 2013. The increase in accounts payable and accrued expenses is primarily related to an increase in our payables related to tomatoes and Mexican avocados. The decrease in inventory is primarily related to a decrease of inventory on hand at January 31, 2014 compared to October 31, 2013.

Cash used in investing activities was $1.8 million for the three months ended January 31, 2014 and related principally to the purchase of property, plant and equipment items.

Cash provided by financing activities was $6.7 million for the three months ended January 31, 2014, which related principally to borrowings on our credit facilities totaling $18.7 million, partially offset by the payment of our $11.0 million dividend and payments on long-term obligations if $1.0 million.

Our principal sources of liquidity are our existing cash balances, cash generated from operations and amounts available for borrowing under our existing credit facilities. Cash and cash equivalents as of January 31, 2014 and October 31, 2013 totaled $6.3 million and $8.0 million. Our working capital at January 31, 2014 was $14.9 million, compared to $12.4 million at October 31, 2013.

We believe that cash flows from operations and available credit facilities will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements. We will continue to evaluate grower recruitment opportunities and exclusivity arrangements with food service companies to fuel growth in each of our business segments. Our non-collateralized, revolving credit facilities with Farm Credit West, PCA and Bank of America, N.A. expire in February 2016. Under the terms of these agreements, we are advanced funds for both working capital and long-term productive asset purchases. Total credit available under these combined borrowing agreements was $65 million, with a weighted-average interest rate of 1.7% at January 31, 2014 and October 31, 2013. Under these credit facilities, we had $52.7 million and $34.0 million outstanding as January 31, 2014 and October 31, 2013. These credit facilities contain various financial covenants, the most significant relating to Tangible Net Worth (as defined), Current Ratio (as defined), and Fixed Charge Coverage Ratio (as defined). We were in compliance with all such covenants at January 31, 2014.


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Contractual Obligations

There have been no material changes to our contractual commitments from those previously disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, 2013 For a summary of the contractual commitments at October 31, 2013, see Part II, Item 7, in our 2013 Annual Report on Form 10-K.

Impact of Recently Issued Accounting Pronouncements

See footnote 1 to the unaudited consolidated condensed financial statements that are included in this Quarterly Report on Form 10-Q.


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