CALAVO GROWERS INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) | MarketScreener

2022-09-03 03:28:31 By : Mr. Gordon Zhang

The recovery from the COVID-19 pandemic and the current economic climate is increasing labor costs, commodity costs and logistical costs. We are experiencing operational challenges that impact our production facilities and our logistics network; the impact of prices for petroleum-based products, packaging materials and commodity costs; and the availability of sufficient labor is increasing costs company-wide.

On December 3, 2021, we paid a $1.15 per share dividend in the aggregate amount of $20.3 million to shareholders of record on November 12, 2021.

On April 29, 2022, we submitted all the documentation required to the Tax Authority and the Federal Tax Court to continue with the consideration of the Administrative Guaranty.

Once the Administrative Guaranty is ruled and accepted by the FTC and tax authority, they will permanently suspend and remove the liens on the fixed assets and bank accounts of CDM.

? It is recognized that CDM operates as a maquila under the authorization of the

It is recognized that all bank deposits corresponding to the purchase of

? avocados on behalf of Calavo Growers Inc. (CGI), are subject to the maquila

program and it is not accruable income for purposes of Income Tax nor

? It is recognized that VAT is recoverable, since CDM demonstrated the existence

of operations carried under the maquila services.

Resolved that certain VAT amounts attributed to the purchase of certain packing

? materials are not recoverable as CDM was not the buyer on record and therefore

did not pay for the materials, which approximated $6.9 million pesos

The court is still reviewing the appeal filed by the Company on May 9, 2022, against the ruling resolving that certain VAT amounts are not recoverable.

During the nine months ended July 31, 2022, we incurred $1.0 million of incremental restructuring and related costs due to the transition to other facilities.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the financial tables below.

Adjusted Net Income (Non-GAAP, Unaudited)

For the three months ended July 31, 2022 and 2021, we realized losses from

(a) Agricola Don Memo totaling $0.3 million and $0.5 million. For the nine months

ended July 31, 2022 and 2021, we realized losses from Agricola Don Memo

totaling less than $0.8 million and $1.8 million.

In July 2021, as part of the FreshRealm Separation Agreement, FreshRealm paid

Calavo the Loan Payoff Amount of $6.0 million, and we recorded the receipt on

the statement of operations as a recovery of the reserve for collectability

(b) of the FreshRealm note receivable. For the three and nine months ended July

31, 2022, we recognized a return to provision discrete tax expense of $0.6

million due to the finalization of the tax treatment of the loss related to

the previously recorded impairment of the investment in FreshRealm.

(c) For the nine months ended July 31, 2021, we incurred professional service

costs related to a considered but non-consummated acquisition.

For the three months ended July 31, 2022 and 2021, we recorded $1.2 million

in unrealized gains and $0.3 million in unrealized losses related to these

(d) mark-to-market adjustments, respectively. For the nine months ended July 31,

2022 and 2021, we recorded $5.8 million in unrealized losses and $6.8 million

For the three months ended July 31, 2022 and 2021, we incurred $0.1 million

related to rent paid for Prepared's former corporate office space that we

(e) have vacated and plan to sublease. For the nine months ended July 31, 2022

and 2021, we incurred $0.3 million related to rent paid for this same office

For the three and nine months ended July 31, 2022, we recorded $1.2 million

and $4.5 million of consulting expenses related to an enterprise-wide

strategic business review conducted for the purpose of restructuring to

improve the profitability of the organization and efficiency of our

(f) operations. In addition, for the nine months ended July 31, 2022, we recorded

$1.4 million of severance accrual related to the restructuring. For the nine

months ended July 31, 2021, we recorded higher stock-based compensation for

the early vesting of restricted stock for the retirement of our former Chief

For the three and nine months ended July 31, 2022, we incurred $0.3 million

and $1.1 million of professional fees related to the Mexican tax matters. For

the three and nine months ended July 31, 2022, we recognized a return to

(g) provision discrete tax expense of $0.5 million due to the finalization of the

tax treatment for the final settlement of the 2011 Assessment (see below).

On October 18, 2021, we announced the closure of RFG's (Prepared's) food

processing operations at our Green Cove Springs (near Jacksonville), Florida

(h) facility, as part of our Project Uno profit improvement program. As of

November 15, Prepared's Green Cove Springs facility has ceased operations. We

incurred $1.0 million of expenses for the nine months ended July 31, 2022,

related to the closure of this facility.

(i) Tax impact of non-GAAP adjustments are based on effective year-to-date tax

Reconciliation of EBITDA and Adjusted EBITDA (Non-GAAP, Unaudited)

The following table presents EBITDA and adjusted EBITDA, each a non-GAAP measure, and reconciles them to net income (loss) attributable to Calavo Growers, Inc., which is the most directly comparable GAAP measure. See "Non-GAAP Financial Measures" above (in thousands, except per share amounts).

See prior page for footnote references

The following table summarizes our net sales by business segment for each of the three and nine months ended July 31, 2022 and 2021:

As of the end of the third quarter of fiscal 2022, we have begun importing avocados into the United States from our subsidiary Avocados de Jalisco. We expect this volume to increase in the fourth quarter of fiscal 2022.

Third Quarter 2022 vs. Third Quarter 2021

Sales of tomatoes decreased $2.4 million, or 21%, for the third quarter of 2022, when compared to the prior year period. This decrease in tomato sales was primarily due to a 24% decrease in the cartons sold of tomatoes.

Nine Months Ended July 31, 2022 vs. Nine Months Ended July 31, 2021

Third Quarter 2022 vs. Third Quarter 2021

Nine Months Ended July 31, 2022 vs. Nine Months Ended July 31, 2021

Our cost of goods sold consists predominantly of ingredient costs (fruit, vegetables and other food products), packing materials, freight and handling, labor and overhead (including depreciation) associated with packing, distributing and/or preparing food products, and other direct expenses pertaining to products sold.

Cash used in investing activities was $7.7 million for the nine months ended July 31, 2022, which related to purchases of property, plant, and equipment.

The Fixed Charge Coverage Ratio (FCCR) covenant was waived for the quarters

? ended October 31, 2021, January 31, 2022 and April 30, 2022. The covenant was

resumed for the quarter ended July 31, 2022.

The quarterly FCCR covenant was replaced by a cumulative monthly minimum

? Consolidated EBITDA covenant, with the first measurement occurring as of

January 31, 2022 for the three months then ended, and continuing monthly

Consolidated financial statements must be submitted monthly for the month and

? year-to-date period, beginning with the financial statements for the month of

November 2021 and continuing through June 2022.

The above terms and conditions will remain in effect until such time as the Company has certified compliance with a 1.15 to 1.0 minimum FCCR for two consecutive fiscal quarters.

? The cumulative monthly minimum Consolidated EBITDA testing has been waived and

the CLR covenant testing is waived through July 31, 2022.

? Minimum Consolidated EBITDA of $3 million, $3 million and $5 million for the

months of February, March and April 2022, respectively, will be required.

Monthly cumulative FCCR of 1.20 starting with the quarter ended April 30, 2022,

? converting to trailing 12 months calculation starting as of October 31, 2022

and quarterly thereafter. For April through September 2022, dividends paid in

Impact of Recently Issued Accounting Pronouncements

See Note 1 to the consolidated condensed financial statements included in this Quarterly Report.

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