EVERYBODY’S
Favorite
C A L AV O G R O W E R S , I N C . 1 1 41 A CU MMIN GS ROAD SANTA PAUL A, C ALIF ORNIA 93060
C A L AV O G R O W E R S , I N C . 2 019 A N N UA L R E P ORT
W W W. C A L AV O . C O M
21
C V G W / / 1
More and fresher reasons than ever for being everybody’s favorite—from growing partners to valued customers to consumers everywhere who enjoy the Calavo family of brands.
We weren’t always this popular. There was a time that the avocado was just
a curiosity—a regional legend of indescribably good taste. But then something
happened on our way to good health and better eating, this odd-looking,
bumpy-skinned fruit starting turning up in all sorts of different cuisines, and
more and more on grocery store shelves. People everywhere were suddenly
eating and ordering everything with avocados. What in the avocado was
happening!?
Guacamole happened, for one. California rolls happened, for another. But
there was something more creating this huge and growing appetite for
avocados—something else that was feeding this frenzy—and, as it turns out,
it was right in front of our faces every time we picked up an avocado to slice
into its buttery goodness. It was the label on each and every perfect piece
of fruit. THE CALAVO LABEL.
You see, these weren’t just any avocados. These were Calavo avocados, which meant
they were suddenly in season, every season. Our well-planned growth and continued
advancements in sourcing, distribution, and ripening changed people’s perception and
palate for avocados. Now, people could eat them everyday, and people are!
Today, Calavo avocados are everybody’s favorite, and it’s not just because
of all the delicious ways you can enjoy them, or as importantly the incredible
health benefits packed into every one. More so, it’s the assurance that
comes from that Calavo label—a promise from our brand and our company—
that everything we’re producing now—from the fresh fruits and vegetables
to our delicious salsas, fresh salads, prepared foods and more—will be your
favorite. Consumers, grocers, food-service providers, chefs and, as a result,
our investors, all wholeheartedly agree—
BECAUSE CALAVO MAKES EVERYTHING BETTER.
C V G W / / 2-3
“Because avocados are a super food,
Calavo year after year posts super operating results.”
REVENUE
(Dollars in Millions)
GROSS PROFIT
(Dollars in Millions)
$1,196
$128.1
$1,089
$1,076
$113.6
$114.5
$935.7
$856.8
$85.2
$107.5
15
16
17
18
19
15
16
17
18
19
ADJUSTED NET INCOME
(Dollars in Millions)
ADJUSTED EARNINGS PER SHARE
(Dollars)
$53.1***
$3.02†††
$43.7**
$38.0*
$38.0
$27.2
$2.49††
$2.17†
$1.57
$2.18
15
16
17
18
19
15
16
17
18
19
(*) Adjusted Annual Net Income before certain management transition expenses ($1.2 million) and tax impact of adjustments ($0.4 million). After amounts, net income totaled $37.3 million.
(**) Adjusted Annual Net Income before non-cash losses recognized from FreshRealm ($12.0 million), one-time, non-cash tax charges from Tax Cut & Jobs Act ($1.7 million), certain management transition expenses ($0.9 million), and tax impact of
adjustments ($3.2 million). After amounts, net income totaled $32.3 million.
(***) Adjusted Annual Net Income before non-cash losses recognized from FreshRealm ($14.1 million), non-cash, unrealized loss on ownership interest in Limoneira Company ($9.7 million), gain ($1.6 million, net of commission) on sale of Temecula packinghouse, and tax
impact of adjustments ($5.8 million). After amounts, net income totaled $36.6 million.
(†) After management transition expenses and tax impact of adjustments described above, diluted EPS totaled $2.13.
(††) After non-cash losses recognized from FreshRealm, one-time, non-cash tax charges from Tax Cut & Jobs Act, management transition expenses and tax impact of adjustments described above, diluted EPS totaled $1.84.
(†††) After non-cash losses recognized from FreshRealm, non-cash, unrealized loss on ownership interest in Limoneira company, gain on sale of Temecula packinghouse and tax impact of adjustments described above, diluted EPS totaled $2.08.
C V G W / / 4-5
C V G W / / 9-9
“Because my kids fight over anything with avocados, that’s one less fight to eat healthy.”
“Because Calavo’s been part of my family for three generations,
our fresh avocados can be a part of yours.”
“AVOCADO FACIALS MAKE MY SKIN GLOW.”
“AVOCADO SMOOTHIES—
SO RICH, SO DELICIOUS.”
C A L AV O F R E S H Everybody’s
jumping aboard the “Avocado
Express.” It’s no wonder that this
super food is the super favorite
in homes and restaurants in the
U.S. and around the globe. With
the all-source U.S. avocado
supply reaching nearly 2.6 billion
pounds last year—and growing—it
provides continued expansion
opportunities for the company.
We’re working tirelessly to make
everybody’s favorite avocado—
Calavo—the industry leader
domestically and for export to
markets across Asia and Europe.
“TODAY’S BUSY FAMILIES DEMAND CONVENIENCE AND FRESH, HEALTHY EATING OPTIONS.”
RFG’s meal kits and fresh, prepared fruits and vegetables deliver on all counts.
C V G W / / 6-7
C V G W / / 11-11
Thinking up new recipes daily in RFG’s prep kitchen.
R E N N A I S A N C E F O O D G R O U P Consumer demand for convenience and healthy
eating options are driving the refrigerated fresh packaged goods category—the fastest-
growing segment of the retail grocery industry estimated at $12-14 billion in sales.
Since its acquisition by Calavo, the RFG business unit has leveraged our vast resources
to build a national manufacturing footprint that can meet the just-in-time distribution
requirements of grocery customers anywhere. Two new production facilities added
in 2019—in Oregon and Georgia—round out these capabilities and will propel future
profitable growth.
C V G W / / 8-9
C V G W / / 13-13
C A L AV O F O O D S Our fresh prepared
guacamole and salsas are so delicious and
flavorful that we’ve staked our sterling name
they’re as good as homemade…and maybe
better. These terrific products complement
our fresh avocados, tomatoes and papayas,
as well as the RFG family of products, while
extending the company’s brand presence,
especially at the retail grocery level. Beyond
great taste and brand-building, our Foods
unit delivers solid incremental contribution to
Calavo’s total sales and gross profit, too.
“FOR THE PERFECT SALAD!”
“FOR HEALTH AND ENERGY!”
TOMATOES BURSTING WITH FLAVOR!
C V G W / / 10-11
C V G W / / 8-9
“BECAUSE MY CUSTOMERS DEMAND FRESH
and Calavo delivers on that daily.”
“Sweet papaya that will make anyone smile.”
“BECAUSE WE KNOW GAME-DAY GUACAMOLE
ALWAYS SCORES BIG POINTS.”
“Because Calavo products fit our active lifestyle
and its shares round out our portfolio.”
C V G W / / 12-13
C V G W / / 17-17
S H A R E H O L D E R R E T U R N S We maintain
dual of objectives of reinvesting profit in
Calavo, which has been instrumental to our
growth, and delivering the highest possible
returns to our shareholders in the form of the
annual cash dividend on our common stock.
We are highly successful on both fronts. Last
year, while posting record operating results
once again, we also returned more than $19
million to owners via a $1.10 per share payout,
the eighth consecutive annual increase and a
450 percent rise since 2002.
“Because my busy schedule makes
healthy eating an important investment, too.”
“CVGW IS A WALLSTREET FAVORITE—admired for its strong, consistent financial performance.”
CALAVO—EVERYBODY’S FAVORITE!
C V G W / /14-15
LUCIOUS AVOCADOS!
“A super food unlike any other.”
YUMMY TOMATOES!
“Rich in lycopene and nutrients.”
TASTY GRAB ‘N GO SALADS!
“Must-haves for my on-the-go lifestyle.”
SUN-KISSED PAPAYAS!
“One bite transports me to Hawaii.”
ADDICTIVE GUACAMOLE!
“The crowds go wild for it at all my parties.”
FRESH-CUT FRUIT AND VEGGIES!
“Training-table staples for a future Hall of Famer.”
DELICIOUS MEAL KITS!
“Time-saving convenience, especially for a
busy power couple like us.”
C V G W / / 16-17
It isn’t just Calavo’s top-quality avocados, diversified
produce and outstanding fresh products that make us
Everybody’s Favorite. We’re widely admired across the
industry for our operating execution and performance,
and by Wall Street for the company’s stellar investor
returns. Consider the decade in review and just a few
of our many accomplishments during the 10-year stretch
from 2010 through 2019.
REVENUES ROCKETED, tripling from just under $400 million
in 2010 to about $1.2 billion last year, a compound annual
growth rate of 13.0 percent and 10 consecutive years of
posting new all-time company highs.
EARNINGS PER SHARE SOARED to $3.02 (on an adjusted
basis) in 2019 from $1.22 in 2010. This translates compound
annual growth in earnings of 10.6 percent.
SHAREHOLDER VALUE CREATED. Calavo’s market
capitalization stood at more than $1.5 billion at the most
recent fiscal year end, climbing nearly four-fold from $320
million in 2010.
INVESTOR RETURNS DELIVERED. Our 2019 annual cash
dividend totaled $1.10 per share—the company’s eighth
straight increase and 18th consecutive payout—a two-fold
rise from 55 cents per share awarded in 2010. A $10,000
investment in Calavo shares at the start of fiscal 2010,
including reinvested dividends, would have increased in
value by about 500 percent over 10 years to $59,657.
ACQUISITIONS COMPLETED. The company’s 2011 purchase
of Renaissance Food Group (RFG) diversified Calavo into the
refrigerated fresh packaged goods category—the fastest-
growing segment of the retail grocery category. Leveraging
our breadth of resources, RFG revenues have nearly
quintupled from a run rate of $110 million at the time of the
deal to nearly $500 million last year.
FACILITIES LAUNCHED. We grew fresh avocado production
capacity with a new packinghouse in Jalisco, Mexico for
export to markets outside the U.S. Calavo added new RFG
production facilities in Florida, Southern California, Oregon
and Georgia—as well as expanded operations in Texas—
to build a seamless national footprint with just-in-time
distribution capabilities.
AN INVESTOR FAVORITE
FROM A DECADE OF ACHIEVEMENTS
C V G W / / 18-19
TO OU R SH A R E HOL DE RS
I am pleased to report that fiscal 2019 was another outstanding year for your company, capping a decade
that was arguably the most transformational in Calavo’s long and productive history. Among the notable
achievements during the year were:
Record operating results, with nearly all key metrics reaching new company highs, including
revenues, gross profit, operating income, adjusted net income and adjusted earnings per share;
Strong performance in our Fresh business segment as we successfully navigated a challenging
avocado market environment thanks to our ability to operate profitably even in the face of
industry crosscurrents; and,
Expanding the national manufacturing footprint of our Renaissance Food Group business segment,
with new production facilities in Georgia and Oregon that enhance distribution capabilities and
lessen reliance on co-packing partners.
S
T
N
E
M
E
V
E
I
H
C
A
9
1
0
2
Y
F
For the fiscal year ended October 31, 2019,
If that’s not enough to qualify Calavo as
Calavo reported net income 14 percent above the
Everybody’s Favorite—the theme of this year’s
preceding year, rising to $36.6 million or $2.08 per
annual report—consider our performance in terms
diluted share, from $32.3 million or $1.84 per diluted
of delivering shareholder returns. In recognition
share one year earlier. Excluding certain items
of our record-setting performance and the Board
impacting comparability, adjusted net income
of Directors’ confidence about the company’s
rose 22 percent to a record $53.1 million or $3.02
prospects moving forward, Calavo announced a
per diluted share, from $43.7 million or $2.49 per
$1.10 per share cash dividend on its common stock,
diluted share in fiscal 2018. These results were
a 10 percent increase over the preceding year. We
substantially enhanced by the strong performance
have consistently rewarded our share owners with
in our core avocado business, which I will discuss
a cash dividend for the 18 consecutive years since
in more detail below.
we became publicly traded in 2002, and that dividend
Our revenues registered double-digit growth
has increased by 450 percent over that time.
to $1.2 billion, a 10 percent increase over $1.1
The tent pole of our operating performance last
billion in the preceding year. We take special
year was our fresh avocado business, where year-in
satisfaction that this was the tenth consecutive
and year-out we have demonstrated Calavo’s ability
year—from beginning to end of decade—that
to execute across a range of market conditions to
Calavo’s top line reached a new company high.
deliver both growth and consistent profitability.
Gross profit climbed to a new record of $128.1
million or 10.7 percent of revenues, from $113.6
million or 10.4 percent of revenues in fiscal 2018.
Operating income grew 26 percent to $71.0 million
from $56.5 million a year earlier.
The past decade was one of extraordinary
expansion for the avocado industry, with the all-
source U.S. supply more than doubling to nearly
2.6 billion pounds last year from about 1.2 billion
pounds in 2010.
“WHO WOULD HAVE EVER THOUGHT?”
L E E E . C OL E
CHAIRMAN, PRESIDENT AND CEO
C V G W / / 20-21
This translates to per-capita annual consumption of
The RFG segment delivered steady top line growth in
about eight pounds of fruit today, compared to about
fiscal 2019, even as it navigated a number of broader
three pounds ten years ago.
industry and co-pack partner circumstances—
This upward trend continues. Early industry
forecasts estimate the 2020 avocado supply, and
matching consumption, will rise again by at least
10 percent. Much has been written—including in
these reports to you—about the reasons for this
respectively, raw materials availability and product
recalls—that challenged the business segment
last year. Despite those conditions, RFG registered
notable achievements in fiscal 2019 that will provide
solid support as it moves forward.
surging growth: shifting demographics, increased
The business segment opened two additional
understanding of avocados’ myriad health benefits,
production facilities—in Oregon to serve the Pacific
and on-point industry marketing strategies.
Northwest, where RFG had relied on co-packing
Less discussed, but in my view an equally important
driver of increasing demand, is the improved quality
of fresh avocados across the industry over the past
decade. Calavo has been at the forefront of this
charge. Distribution methods continue to advance,
as do ripening and pre-conditioning technologies;
increasingly, these make better and even more
appealing fruit available to our customers.
As consumption rises and consumers grow more
discerning, their demand for the highest quality
product increases, too. That is both a challenge for
the industry and an advantage for Calavo which, as
the industry leader, has built its brand on delivering
excellence. We think that our position as quality
leader, along with our vast resources, provide our
company with great future prospects in the fresh
avocado segment, both domestically and abroad, and
that Calavo is uniquely well positioned to capitalize
upon this opportunity.
partners, and in Georgia to better penetrate customer
opportunities in the southern U.S. These additions
extend our national distribution capabilities, and
increasingly bring RFG production under direct
company control. In our continuing efforts to gain
operating efficiencies and enhance margins, while
ramping up these new facilities RFG also continued
to optimize manufacturing at production centers
added in recent years.
Since being acquired by Calavo in 2011, RFG has
achieved exceptional top line performance, with
revenues virtually quintupling over that time. While
continuing to pursue additional customer acquisition
and sales growth, RFG is putting additional focus
in the current year on improved gross profit
performance across our company-controlled
manufacturing footprint, and we are confident about
its ability to achieve these goals.
Turning to the Calavo Foods segment, we have
always been—and remain—highly enthusiastic
about this strong business unit and its prospects.
Foods produces outstanding fresh prepared
I am pleased that our company will be led by Jim
guacamole and products, is complementary to
Gibson, a co-founder of our RFG business segment
our other two business segments, and extends the
and until now its president. In Jim we have an
Calavo brand at the retail levels, all while delivering
outstanding individual who will marshal Calavo’s
solid incremental revenue and profit contributions to
vast resources as the company heads toward its
overall results.
However, with fresh avocados as the segment’s
principal raw ingredient, Foods’ profitability does run
counter-cyclically to fruit prices in the marketplace.
That proved to be the case for most of last year,
when market pricing for fresh avocados dampened
100th anniversary. Jim’s track record shows him to
be uniquely qualified for his new role, and he has
impressed all of us who have worked with him with
his intelligence, steady guiding hand, and sound
judgment. I look forward to his success as guardian
of this great company, and wish him Godspeed.
Foods’ typically strong gross profit and margin. Those
Jim will not be alone in executing the company’s
unusually high fruit prices did moderate by the fourth
strategic agenda. He will be supported—just as I
quarter, whereupon profit in the Foods segment
was—by an outstanding senior management team, a
began an uptick toward historic norms. Looking
dedicated rank-and-file workforce, and the wisdom
ahead, we see revenues re-accelerating in 2020
of his Board for guidance and sound counsel. I thank
to the double-digit levels of past years, and sharp
and am grateful to them all.
improvements in gross profit thanks to the larger fruit
supply and a series of internal operating initiatives.
I am equally appreciative to our customers and
their customers for their patronage, and to you, my
Being the steward of Calavo and its legacy,
fellow shareholders, for your support and confidence
presiding over its transformation from grower-owned
of Calavo on my watch.
Sincerely,
L E E E . C OL E
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
cooperative to publicly traded status, and leading
this great company to new heights year after year
after year, are among the proudest achievements of
my professional life. I have always had unwavering
optimism and confidence in Calavo’s potential and
still do. Now, after 21 years as president and CEO
and serving as board chairman since 1988, it is time
for me to turn the reins over to the next generation
of leadership of this great company. I am not going
far, though—just down the road from Calavo back
to the ranch, where my ties to the company will
continue to run deep as a member of the Board of
Directors, one of Calavo’s largest growers, and a
significant shareholder.
OUR BOARD OF DIRECTOR
C V G W / / 27-27
C V G W / / 22-23
(from left to right) KATHLEEN HOLMGREN Management Consultant, Ventura, California LECIL E. COLE Chairman, President and CEO, Calavo Growers, Inc., Santa
Paula, California SCOTT N. VAN DER KAR Second Vice Chairman, General Manager, Van Der Kar Family Farms, Carpinteria, California DORCAS H. THILLE Owner
and Operator, J.K. Thille Ranches, Santa Paula, California JAMES D. HELIN President, CEO, JDH Associates, Los Angeles, California J. LINK LEAVENS First Vice
(from left to right) JOHN M. HUNT Manager, Embarcadero Ranch, Goleta, California HAROLD S. EDWARDS President and CEO, Limoneria Company, Santa Paula,
California STEVEN W. HOLLISTER Managing Member, Rocking Spade, LLC, Arroyo Grande, California MARC L. BROWN Attorney/Partner, Troy Gould PC, Los
Angeles, California DONALD “MIKE” SANDERS President, S&S Grove Management, Escondido, California EGIDIO “GENE“ CARBONE, JR. Retired CFO, Calavo
Chairman, General Manager, Leavens Ranches, Ventura, California MICHAEL A. “MIKE” DIGREGORIO Board & Strategic Advisory Services, Westlake
Growers, Inc., Santa Paula, California
Village, California
Selected Consolidated Financial Data
The following summary of consolidated financial data (other than information regarding the volume of products sold) for each of the years
in the five-year period ended October 31, 2019, are derived from the audited consolidated financial statements of Calavo Growers, Inc.
Historical results are not necessarily indicative of results that may be expected in any future period. The following data should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial
statements and notes thereto that are included elsewhere in this Annual Report.
FISCAL YEAR ENDED OCTOBER 31,
(In thousands, except per share data)
INCOME STATEMENT DATA : (1) ( 2 ) ( 4 ) ( 6 )
Net sales
Gross profit
Selling, general and administrative
Net income attributable to Calavo Growers, Inc.
Basic net income per share
Diluted net income per share
BAL ANCE SHEE T DATA
AS OF END OF PERIOD:
Working capital
Total assets(4)(5)
Accrued expenses
Current portion of long-term obligations(4)(5)
Long-term obligations, less current portion(4)(5)
2019
2018
2017
2016
2015
$
1,195,777
$
1,088,758
$
1,075,565
$
935,679
$
856,824
$
$
$
128,082
59,113
36,646
113,616
57,081
32,281
114,544
56,651
37,270
107,534
46,440
38,022
2.09
2.08
$
$
1.85
1.84
$
$
2.14
2.13
$
$
2.19
2.18
$
$
85,227
41,558
27,199
1.57
1.57
36,886
$
29,567
$
3,661
$
25,612
$
18,964
390,360
39,629
762
5,412
367,736
38,521
118
314
364,117
39,946
129
439
327,933
31,095
138
445
284,945
21,311
2,206
586
Shareholders’ equity
285,869
264,959
244,122
215,069
185,982
C V G W / / 24-25
FINANCIAL SECTION
CASH FLOWS PROVIDED
BY (USED IN ) :
Operations
Investing activities(2)(3)(4)(5)
Financing activities(3)
OTHER DATA :
Cash dividends declared per share
Net book value per share
Pounds of California avocados sold
Pounds of non-California avocados sold
Pounds of processed avocados products sold
$
72,099
$
48,426
$
62,140
$
61,968
$
37,283
(2) During fiscal 2018, 2017 and 2016, we contributed $3.5 million, $7.5 million and $3.2 million as investments in FreshRealm. Our total investment of $5.8 million,
(1) During fiscal 2019 and 2018, we have recognized $14.1 million and $12.0 million in losses from FreshRealm, which has been recorded as losses from unconsolidated entities.
(31,850)
(33,796)
(30,204)
(23,327)
(53,668)
(15,689)
(21,731)
(33,566)
(21,054)
(15,802)
$
$
1.10
16.23
$
$
1.00
15.11
$
$
0.95
13.92
$
$
0.90
12.33
$
$
32,097
322,657
32,016
65,428
291,585
32,333
53,875
245,463
29,911
109,545
278,200
26,773
0.80
10.70
75,538
312,710
27,182
$19.9 million, $28.4 million and $21.0 million in FreshRealm as of October 31, 2019, 2018, 2017 and 2016, has been recorded as investment in unconsolidated subsidiaries
on our balance sheet.
(3) During fiscal 2019 and 2018, we loaned $23.8 million and $9.0 million as notes receivable from FreshRealm. For fiscal 2019, we have recorded $2.4 million as interest
related to the notes receivable balance from FreshRealm.
(4) In April 2019, we sold our Temecula, California packinghouse for $7.1 million in cash and, concurrently, leased back a portion of the facility representing approximately
one-third of the total square footage. This generated a gain of $6.4 million. Since our leaseback of the building is classified as a capital lease and covers substantially
all of the leased property, the gain recognized currently is the amount of the gain in excess of the recorded amount of the leased asset. As a result, we recognized
a gain of approximately $1.9 million in the second quarter of fiscal 2019 and recorded a deferred gain of $4.5 million, which will be recognized over the life of the lease.
In connection with the capital lease we capitalized $3.2 million as a capital lease in property, plant and equipment and recorded a lease liability of $3.2 million
($0.1 million in current portion and $3.1 million in long term debt).
(5) During our third quarter of fiscal year 2019, we entered into a 10-year building and equipment lease for fresh food facility in Conley, GA. This facility is primarily intended
to process fresh-cut fruit & vegetables and prepared foods products for our RFG business segment. Annual rent for the building and equipment approximates $0.9
million and $0.6 million, respectively, over the life of the lease. The lease for the equipment is considered to be a capital lease, therefore, we calculated the present
value of the minimum lease payments related to the equipment and capitalized $2.8 million as a capital lease in property, plant and equipment and recorded $2.8 million
as a lease obligation.
(6) In January 2016, the FASB issued an ASU, which requires equity investments (except those accounted for under the equity method of accounting) to be measured at
fair value with changes in fair value recognized in net income. The Company adopted this new standard at the beginning of fiscal 2019. For the year ended October 31, 2019,
we sold 51,271 shares of Limoneira stock and recorded a loss of $0.1 million in our consolidated statements of income. Limoneira’s stock price at October 31, 2019,
and October 31, 2018 equaled $18.92 per share, and $24.65 per share. Our remaining shares of Limoneira stock, totaling 1,677,299, were revalued to $18.92 per share at
October 31, 2019 and, as a result, we recorded a loss of $9.6 million for the year ended October 31, 2019 in our consolidated condensed statements of income.
00
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
You should read the following discussion and analysis of our
financial condition and results of operations together with
“Selected Consolidated Financial Data” and our consolidated
financial statements and notes thereto that appear elsewhere
in this Annual Report. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties,
and assumptions. Actual results may differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including, but not limited to, those presented
under “Risks Related to Our Business” included in our Annual
Report on Form 10-K.
OVERVIEW
We are a leader in the distribution of avocados, prepared avocado
products, and other perishable food products throughout the United
States. Our expertise in marketing and distributing avocados, prepared
avocados, and other perishable foods allows us to deliver a wide array
of fresh and prepared food products to retail grocery, foodservice, club
stores, mass merchandisers, food distributors and wholesalers on a
worldwide basis. We procure avocados from California, Mexico and
other growing regions around the world. Through our various operating
facilities, we (i) sort, pack, and/or ripen avocados, tomatoes and/or
Hawaiian grown papayas, (ii) create, process and package guacamole
and salsa and (iii) create, process and package a portfolio of healthy
fresh foods including fresh-cut fruit, fresh-cut vegetables, and
prepared foods. We report our operations in three different business
segments: Fresh products, Calavo Foods and RFG. See Note 10 to our
consolidated financial statements for further discussion.
Our Fresh products business grades, sizes, packs, cools, and ripens
(if desired) avocados for delivery to our customers. During fiscal 2019,
we operated four packinghouses and four operating and distributing
facilities (aka value-added depots or VADs) that handle avocados that
are sold across the United States and to select international markets.
We believe that our continued success in marketing avocados is
largely dependent upon securing a reliable, high-quality supply of
avocados at reasonable prices, and keeping the handling costs low as
we ship avocados to our packinghouses and distribution centers. We
believe our diversified avocado sources help provide a level of relative
supply stability that may, over time, serve to increase the availability
and demand for avocados among consumers in the United States
and elsewhere in the world. Significant fluctuations in the volume of
avocados delivered have an impact on the per pound packing costs of
avocados we handle. Generally, larger crops will result in a lower per
pound handling cost. As a result of our investment in packinghouse
equipment, distribution centers with value-added ripening and packing
capabilities, and personnel, we believe that our cost structure is
geared to optimally handle larger avocado volume. We believe our
efforts in distributing our other various perishable foods, such as
tomatoes and papayas, complement our offerings of avocados. From
time to time, we continue to explore the distribution of other crops that
provide reasonable returns to our business.
Our Calavo Foods business processes avocados into a wide
variety of guacamole products, and distributes the processed product
to our customers. All of our prepared avocado products shipped to
North America are “cold pasteurized” and include both frozen and
fresh guacamole. Due to the high-quality, no preservative nature of
our guacamole and the variety of packaging formats that we offer,
we believe that we are well positioned to address the diverse taste
and needs of today’s foodservice and retail customers. Additionally,
we also prepare various fresh salsa products. Our Calavo Foods
segment maintains relationships with foodservice companies and
food retailers. We continue to seek to expand our relationships with
major foodservice companies and food retailers and develop alliances
that will allow our products to reach a larger percentage of the
marketplace. Net sales of frozen products represented approximately
38% and 41% of total processed segment sales for the years ended
October 31, 2019 and 2018. Net sales of our refrigerated products
represented approximately 62% and 59% of total processed segment
sales for the years ended October 31, 2019 and 2018.
Our RFG business produces, markets and distributes nationally
a portfolio of healthy, high quality fresh packaged food products for
consumers sold through the retail channel. RFG products include
fresh-cut fruit and vegetables, fresh prepared entrée salads, wraps,
sandwiches and fresh snacking products, as well as ready-to-heat
entrees and other hot bar and various deli items, meals kit components
and salad kits. RFG products are marketed under the Garden Highway
Fresh Cut, Garden Highway, and Garden Highway Chef Essentials
brands, as well as store-brand and private label programs.
The operating results of all of our businesses have been, and
will continue to be, affected by quarterly and annual fluctuations
and market downturns due to a number of factors, including but not
limited to pests and disease, weather patterns, changes in demand by
consumers, food safety advisories impacting the fresh perishable food
categories in which we currently operate, the timing of the receipt,
reduction, or cancellation of significant customer orders, the gain or
loss of significant customers, market acceptance of our products, our
ability to develop, introduce, and market new products on a timely
basis, the availability, quality and price of raw materials, new product
introductions by our competitors, the utilization of production capacity
at our various plant locations, change in the mix of products that our
Fresh, Calavo Foods and RFG segments sell, and general economic
conditions. We believe, however, that we are currently positioned to
address these risks and deliver favorable operating results for the
foreseeable future.
Recent Developments
Dividend Payment
On October 1, 2019, the Company declared a $1.10 per share
cash dividend to shareholders of record on November 15, 2019.
On December 6, 2019, the Company paid this cash dividend, which
totaled $19.4 million.
Litigation
From time to time, we are 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.
C V G W / / 26-27
Mexico tax audits
We conduct business both domestically and internationally and,
as a result, one or more of our subsidiaries files income tax returns in
U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in
the normal course of business, we are subject to examination by taxing
authorities, primarily in Mexico and the United States. During our third
quarter of fiscal 2016, our wholly owned subsidiary, Calavo de Mexico
(CDM), received a written communication from the Ministry of Finance
and Administration of the government of the State of Michoacan,
Mexico (MFM) containing preliminary observations related to a 2011
tax audit of such subsidiary. MFM’s preliminary observations outline
certain proposed adjustments primarily related to intercompany
funding, deductions for services from certain vendors/suppliers
and Value Added Tax (IVA). During the period from our fourth fiscal
quarter of 2016 through our first fiscal quarter of 2019, we attempted
to resolve our case with the MFM through working meetings attended
by representatives of the MFM, CDM and PRODECON (Local Tax
Ombudsman). However, we were unable to materially resolve our case
with the MFM through the PRODECON process.
As a result, in April 2019, the MFM issued a final tax assessment
to CDM (“the 2011 Assessment”) totaling approximately $2.2 billion
Mexican pesos (approx. $114.4 million USD at October 31, 2019)
related to Income Tax, Flat Rate Business Tax and Value Added Tax,
corresponding to the fiscal 2011 tax audit. We have consulted with an
internationally recognized tax advisor and continue to believe this tax
assessment is without merit. Therefore, we filed an administrative
appeal challenging the MFM’s fiscal 2011 assessment on June 12, 2019.
The filing of an administrative appeal in Mexico is a process in which
the taxpayer appeals to a different office within the Mexican tax
authorities, forcing the legal office within the MFM to rule on the
matter. This process preserves the taxpayer’s right to litigate in tax
court if the administrative appeal process ends without a favorable or
just resolution. Furthermore, in August 2018, we received a favorable
ruling from Mexico’s Federal Tax Administration Service, Servicio de
Administracion Tributaria’s (the “SAT”) central legal department in
Mexico City on another tax matter (see Note 15 regarding IVA refunds)
indicating that they believe that our legal interpretation is accurate on
a matter that is also central to the 2011 Assessment. We believe this
recent ruling undermines the Assessment we received in April 2019.
We believe we have the legal arguments and documentation to sustain
the positions challenged by the MFM.
Additionally, we also received notice from the SAT, that CDM is
currently under examination related to fiscal year 2013. In January
2017, we received preliminary observations from SAT outlining certain
proposed adjustments primarily related to intercompany funding,
deductions for services from certain vendors/suppliers, and VAT. We
provided a written rebuttal to these preliminary observations during
our second fiscal quarter of 2017. During the period from our third fiscal
quarter of 2017 through our third fiscal quarter of 2018, we attempted
to resolve our case with the SAT through working meetings attended
by representatives of the SAT, CDM and the PRODECON. However, we
were unable to materially resolve our case with the SAT through the
PRODECON process.
As a result, in July 2018, the SAT’s local office in Uruapan issued
to CDM a final tax assessment (the “2013 Assessment”) totaling
approximately $2.6 billion Mexican pesos (approx. $135.1 million
USD at October 31, 2019) related to Income Tax, Flat Rate Business
Tax, and Value Added Tax, corresponding to the fiscal 2013 tax audit.
Additionally, the tax authorities have determined that we owe an
employee’s profit-sharing liability, totaling approximately $118 million
Mexican pesos (approx. $ 6.1 million USD at October 31, 2019).
We have consulted with both an internationally recognized tax
advisor, as well as a global law firm with offices throughout Mexico,
and we continue to believe that this tax assessment is without
merit. In August 2018, we filed an administrative appeal on the 2013
Assessment. CDM has appealed our case to the SAT’s central legal
department in Mexico City. Furthermore, and as noted in the preceding
paragraphs, in August 2018, we received a favorable ruling from the
SAT’s central legal department in Mexico City on another tax matter
(see Note 15 regarding IVA refunds) indicating that they believe that
our legal interpretation is accurate on a matter that is also central
to the 2013 Assessment. We believe this recent ruling significantly
undermines the 2013 Assessment we received in July 2018. We
believe we have the legal arguments and documentation to sustain the
positions challenged by the SAT.
We continue to believe that the ultimate resolution of these matters
is unlikely to have a material effect on our consolidated financial
position, results of operations and cash flows.
Unrealized and realized net loss on Limoneira Stock
In January 2016, the FASB issued an ASU, which requires equity
investments (except those accounted for under the equity method of
accounting) to be measured at fair value with changes in fair value
recognized in net income. The Company adopted this new standard at
the beginning of fiscal 2019. With the adoption of this new standard,
we reclassed unrealized gains of $12.1 million in accumulated other
comprehensive income to retained earnings as of November 1, 2018.
Additionally, for the year ended October 31, 2019, we sold 51,271
shares of Limoneira stock and recorded a loss of $ 0.1 million in
our consolidated statements of income. Limoneira’s stock price at
October 31, 2019, and October 31, 2018 equaled $18.92 per share, and
$24.65 per share. Our remaining shares of Limoneira stock, totaling
1,677,299, were revalued to $18.92 per share at October 31, 2019
and, as a result, we recorded a loss of $ 9.8 million for the year ended
October 31, 2019 in our consolidated condensed statements of income.
Amendment to Credit Agreement
Effective March 1, 2019, we entered into a Second Amendment to
Credit Agreement (the “Second Amendment”) with Farm Credit West,
PCA, and Bank of America, N.A., relating to our Credit Agreement
dated as of June 14, 2016 and the First Amendment to Credit Agreement
dated as of August 29, 2016. The Second Amendment, among other
things, excludes financial results of FreshRealm from Calavo’s financial
reporting requirements and covenant calculations and provides
flexibility in making investments in joint ventures and non-wholly
owned subsidiaries of Calavo.
Sale of Temecula, California Packinghouse
In April 2019, we sold our Temecula, California packinghouse for
$7.1 million in cash ($ 6.7 million, net of transaction costs (primarily
sales commissions) totaling $ 0.4 million) and, concurrently, leased
back a portion of the facility representing approximately one-third of
the total square footage. This generated a gain of $ 6.4 million. Since
our leaseback of the building is classified as a capital lease and covers
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
substantially all of the leased property, the gain recognized currently is
the amount of the gain in excess of the recorded amount of the leased
asset. As a result, we recognized a gain of approximately $1.9 million
in the second quarter of fiscal 2019 and recorded a deferred gain of
$4.5 million, which will be recognized over the life of the lease (i.e.
straight-line over 15 years). We recognized $ 0.2 million of the deferred
gain for fiscal 2019.
In connection with the leaseback of this packinghouse, we
calculated the present value of the minimum lease payments related
to the building and have capitalized $ 3.3 million as a capital lease in
our property, plant and equipment and recorded $ 3.3 million as a lease
obligation.
RFG Georgia facility
During our third quarter of fiscal year 2019, we entered into a
10-year building and equipment lease for fresh food facility in Conley,
GA. This facility is primarily intended to process fresh-cut fruit &
vegetables and prepared foods products for our RFG business segment.
Annual rent for the building and equipment approximates $ 0.9 million
and $ 0.6 million, respectively, over the life of the lease. The lease
for the equipment is considered to be a capital lease, therefore, we
calculated the present value of the minimum lease payments related to
the equipment and capitalized $2.8 million as a capital lease in property,
plant and equipment and recorded $2.8 million as a lease obligation.
Michael Browne’s retirement
On September 20, 2019, Michael Browne advised Calavo, of his
intention to retire as Calavo’s Vice President of Fresh Operations
effective December 15, 2019. Effective December 15, 2019, Mr. Browne’s
responsibilities at Calavo will be transitioned to Calavo’s Director
of Fresh Operations who has reported to Michael Browne for the last
14 years.
Lecil Cole’s retirement
On October 24, 2019, Lecil E. Cole advised Calavo of his intention
to retire as Calavo’s President and Chief Executive Officer, during
the first quarter of calendar year 2020. Calavo’s Board of Directors
is in the process of interviewing and evaluating several, qualified
Chief Executive Officer candidates. Mr. Cole’s retirement will become
effective on the date that his successor as Chief Executive Officer
begins service in that capacity, following selection and appointment by
the Board of Directors. Mr. Cole also advised Calavo that he intends to
continue to serve as Calavo’s Chairman of the Board of Directors, with
a focus on maintaining and enhancing Calavo’s business relationships
with its investors and suppliers of avocados and other products.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation
of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an ongoing basis, we re-evaluate all of our
estimates, including those related to the areas of customer and grower
receivables, IVA tax receivables, inventories, useful lives of property,
plant and equipment, promotional allowances, equity income/
losses and impairment analysis from unconsolidated entities, loans
to unconsolidated entities, income taxes, retirement benefits, and
commitments and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Additionally,
we frequently engage third party valuation experts to assist us with
estimates described below. Actual results may materially differ
from these estimates under different assumptions or conditions as
additional information becomes available in future periods.
Management has discussed the development and selection of
critical accounting estimates with the Audit Committee of the Board
of Directors and the Audit Committee has reviewed our disclosure
relating to critical accounting estimates in this Annual Report.
We believe the following are the more significant judgments
and estimates used in the preparation of our consolidated
financial statements.
Promotional allowances
We provide for promotional allowances at the time of sale, based
on our historical experience. Our estimates are generally based on
evaluating the relationship between promotional allowances and gross
sales. The derived percentage is then applied to the current period’s
sales revenues in order to arrive at the appropriate debit to sales
allowances for the period. The offsetting credit is made to accrued
liabilities. When certain amounts of specific customer accounts are
subsequently identified as promotional, they are written off against
this allowance. Actual amounts may differ from these estimates and
such differences are recognized as an adjustment to net sales in the
period they are identified. We estimate that a one percent (100 basis
point) change in the derived percentage for the entire year would
impact results of operations by approximately $ 0.1 million.
Income taxes
We account for deferred tax liabilities and assets for the future
consequences of events that have been recognized in our consolidated
financial statements or tax returns. Measurement of the deferred items
is based on enacted tax laws. In the event the future consequences
of differences between financial reporting bases and tax bases of
our assets and liabilities result in a deferred tax asset, we perform an
evaluation of the probability of being able to realize the future benefits
indicated by such asset. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
As a multinational corporation, we are subject to taxation in many
jurisdictions, and the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax laws and regulations in
various taxing jurisdictions. If we ultimately determine that the payment
of these liabilities will be unnecessary, the liability will be reversed and
we will recognize a tax benefit during the period in which it is determined
the liability no longer applies. Conversely, we record additional tax
charges in a period in which it is determined that a recorded tax liability
is less than the ultimate assessment is expected to be.
The application of tax laws and regulations is subject to legal
and factual interpretation, judgment and uncertainty. Tax laws and
C V G W / / 28-29
regulations themselves are subject to change as a result of changes
in fiscal policy, changes in legislation, the evolution of regulations and
court rulings. Therefore, the actual liability for U.S. or foreign taxes
may be materially different from management’s estimates, which
could result in the need to record additional tax liabilities or potentially
reverse previously recorded tax liabilities.
Goodwill and acquired intangible assets
Goodwill, defined as unidentified asset(s) acquired in conjunction
with a business acquisition, is tested for impairment on an annual
basis and between annual tests whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. Goodwill is tested at the reporting unit level, which is
defined as an operating segment or one level below the operating
segment. We can use a qualitative test, known as “Step 0,” or a
two-step quantitative method to determine whether impairment has
occurred. In Step 0, we elect to perform an optional qualitative analysis
and based on the results skip the two step analysis. In fiscal 2018, 2017
and 2016, we elected to implement Step 0 and were not required to
conduct the remaining two step analysis. Goodwill impairment testing
requires significant judgment and management estimates, including,
but not limited to, the determination of (i) the number of reporting
units, (ii) the goodwill and other assets and liabilities to be allocated
to the reporting units and (iii) the fair values of the reporting units. The
estimates and assumptions described above, along with other factors
such as discount rates, will significantly affect the outcome of the
impairment tests and the amounts of any resulting impairment losses.
The results of our Step 0 assessments indicated that it was more likely
than not that the fair value of its reporting unit exceeded its carrying
value and therefore we concluded that there were no impairments for
the years ended October 31, 2019, 2018 or 2017.
Investments
We account for non-marketable investments using the equity
method of accounting if the investment gives us the ability to exercise
significant influence over, but not control, an investee. Significant
influence generally exists when we have an ownership interest
representing between 20% and 50% of the voting stock of the investee.
Under the equity method of accounting, investments are stated at
initial cost and are adjusted for subsequent additional investments
and our proportionate share of earnings or losses and distributions.
In order to estimate the fair value of our investment in FreshRealm, we
hired an independent third-party expert to provide their written opinion
on the fair value of our investment. We reviewed and considered their
independent expert opinion in making our determination.
Notes receivable from FreshRealm
As of October 31, 2019, and October 31, 2018, we had notes
receivable (including interest) from FreshRealm totaling $ 35.2 million
and $ 9.09 million. At October 31, 2018, notes receivable from
FreshRealm of $ 9.09 million was included in prepaids and other
current assets. The notes to FreshRealm, as of October 31, 2019, bear
interest at the rate of 10% annually, with monthly interest payments
scheduled to begin on October 31, 2020. This first interest payment
would represent interest due for the month of October 2020 only, with
similar monthly payments scheduled to follow afterwards. The due
date of the notes is November 1, 2021, with the Company having the
option of up to two, one-year extensions (i.e. first to November 1, 2022,
then to November 1, 2023). At October 31, 2019, we have a receivable
of $2.4 million related to interest that we have recorded within Note
receivables to FreshRealm on the balance sheet. We assess the
collectability of these notes from FreshRealm based on their financial
results and, primarily, their cash projections. We have concluded no
reserve is necessary as of October 31, 2019. See Notes 8 and 16 in our
consolidated financial statements for further information.
Allowance for accounts receivable
We provide an allowance for estimated uncollectible accounts
receivable balances based on historical experience and the aging
of the related accounts receivable. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated
statements of income, expressed as percentages of our total net sales,
for the periods indicated:
YEAR ENDED OCTOBER 31,
2019
2018
2017
Net sales
Gross profit
Selling, general and
administrative
Operating income
Interest income
Interest expense
Other income, net
Unrealized and realized
net loss on Limoneira shares
Net income
Net Sales
100.0%
10.7%
100.0%
10.4%
100.0%
10.6%
4.9%
5.9%
0.2%
(0.1)%
0.0%
(0.8)%
3.1%
5.2%
5.2%
0.0%
(0.1)%
0.1%
0.0%
3.0%
5.3%
5.4%
0.0%
(0.1)%
0.0%
0.0%
3.5%
We believe that the fundamental consumption trends for our
products continue to be favorable. Firstly, U.S. avocado demand
continues to grow, with per capita consumption in 2018/19 reaching
8.0 pounds per person, up 7 percent from the previous year, and
approximately double the estimate from a decade ago. We believe
that the healthy eating trend that has been developing in the U.S.
contributes to such growth, as avocados are cholesterol and
sodium free, dense in fiber, vitamin B6, antioxidants, potassium,
folate, and contain unsaturated fat, which helps lower cholesterol.
Also, a growing number of research studies seem to suggest that
phytonutrients, which avocados are rich in, help fight chronic illnesses,
such as heart disease and cancer.
Additionally, we believe that the demographic changes in the U.S.
will impact the consumption of avocados and avocado-based products.
The Hispanic community currently accounts for approximately 18%
of the U.S. population and the total number of Hispanics is estimated
to double by the year 2050. Avocados are considered a staple item
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
purchased by Hispanic consumers, as the per-capita avocado
consumption in Mexico is significantly higher than that of the U.S.
We anticipate avocado products will further penetrate the United
States marketplace, driven by year-round availability of imported fresh
avocados, a rapidly growing Hispanic population, and the promotion
of the health benefits of avocados. As one of the largest marketers of
avocado products in the United States, we believe that we are well
positioned to leverage this trend and to grow our Fresh products and
Calavo Foods segments of our business. Additionally, we also believe
that avocados and avocado based products will further penetrate other
marketplaces that we currently operate in as interest in avocados
continues to expand.
In October 2002, the USDA announced the creation of a Hass
Avocado Board to promote the sale of Hass variety avocados in the
U.S. marketplace. This board provides a basis for a unified funding of
promotional activities based on an assessment on all avocados sold
in the U.S. marketplace. The California Avocado Commission, which
receives its funding from California avocado growers, has historically
shouldered the promotional and advertising costs supporting avocado
sales. We believe that the incremental funding of promotional and
advertising programs in the U.S. will, in the long term, positively
impact average selling prices and will favorably impact our avocado
businesses. During fiscal 2019, 2018 and 2017, on behalf of avocado
growers, we remitted approximately $1.1 million, $1.5 million and
$1.7 million to the California Avocado Commission. During fiscal 2019,
2018 and 2017, we remitted approximately $7.2 million, $ 6.9 million and
$ 5.8 million to the Hass Avocado Board related to avocados. Similarly,
Avocados from Mexico (AFM) was formed in 2013 as the marketing
arm of the Mexican Hass Avocados Importers Association (MHAIA)
and the Association of Growers and Packers of Avocados From Mexico
(APEAM). During fiscal 2019, 2018 and 2017, we remitted approximately
$ 5.4 million, $4.7 million and $ 3.5 million to APEAM primarily related to
these marketing activities for Mexican avocados.
We also believe that our other fresh products, primarily
tomatoes, are positioned for future growth. The tomato is the fourth
most popular fresh-market vegetable (though a fruit scientifically
speaking, tomatoes are more commonly considered a vegetable)
behind potatoes, lettuce, and onions in the U.S. Although stabilizing
in the first decade of the 2000s, annual average fresh-market tomato
consumption remains well above that of the previous decade. Over the
past few decades, per capita consumption of tomatoes has been on
the rise due primarily to the enduring popularity of salads, salad bars,
and submarine sandwiches. Perhaps of greater importance has been
the introduction of new and improved tomato varieties, the increased
development of hot-house grown tomatoes (such as those grown by
our ADM affiliate), heightened consumer interest in a wider range of
tomatoes, a surge of new immigrants who eat vegetable-intensive
diets, and expanding national emphasis on health and nutrition.
Papayas have become more popular as the consumption in the
U.S. has more than doubled in the past decade. Papayas have high
nutritional benefits. They are rich in anti-oxidants, the B vitamins,
folate and pantothenic acid, potassium and magnesium, and fiber.
Additionally, through the acquisition of RFG, we substantially
expanded and accelerated the Company’s presence in the fast-growing
refrigerated fresh packaged foods category through an array of retail
product lines for produce, deli, and foodservice departments. RFG
products include fresh-cut fruit and vegetables, fresh prepared entrée
salads, wraps, sandwiches and fresh snacking products as well as
ready-to-heat entrees and other hot bar and various deli items, meals
kits and salad kits. Value-added fruits and vegetables have continued
to grow faster than their broader produce categories as consumers
increasingly place value on the convenient nature of those products
and producers like RFG continue to develop new formulations of
value-added products. RFG has also expanded the capacity to provide
products for a larger portion of the Fresh Deli department, which
remains one of the fastest growing aisles in retail grocery.
The following tables set forth sales by product category and sales incentives, by segment (dollars in thousands):
YEAR ENDED OCTOBER 31, 2019
YEAR ENDED OCTOBER 31, 2018
FRESH
PRODUCTS
CALAVO
FOODS
RFG
TOTAL
FRESH
PRODUCTS
CALAVO
FOODS
RFG
TOTAL
C V G W / / 30-31
YEAR ENDED OCTOBER 31, 2018
YEAR ENDED OCTOBER 31, 2017
FRESH
PRODUCTS
CALAVO
FOODS
RFG
TOTAL
FRESH
PRODUCTS
CALAVO
FOODS
RFG
TOTAL
$
511,730
$
—
$
—
$
511,730
$
546,433
$
—
$
—
$
546,433
31,608
11,699
498
—
—
—
—
—
—
99,635
3,423
—
—
—
—
—
—
451,203
451,203
31,608
11,699
498
99,635
3,423
451,203
29,199
9,402
445
—
—
—
—
—
—
85,204
3,951
—
—
—
—
—
29,199
9,402
445
85,204
3,951
—
419,973
419,973
1,109,796
585,479
89,155
419,973
1,094,607
THIRD-PAR T Y SALES:
Avocados
Tomatoes
Papayas
Other fresh products
Prepared avocado products
Salsa
Fresh-cut fruit & vegetables
and prepared foods
Total gross sales
555,535
103,058
Less sales incentives
(2,327)
(11,412)
(2,273)
(16,012)
(1,503)
(11,576)
(1,465)
(14,544)
Less inter-company
eliminations
(1,554)
(3,472)
—
(5,026)
(1,314)
(3,184)
—
(4,498)
Net sales
$
551,654
$
88,174
$
448,930
$
1,088,758
$
582,662
$
74,395
$
418,508
$ 1,075,565
Net sales to third parties by segment exclude inter-segment sales
and cost of sales. For fiscal year 2019, 2018 and 2017, inter-segment
sales and cost of sales of $2.2 million, $1.6 million and $1.3 million
between Fresh products and RFG were eliminated. For fiscal year 2019,
2018 and 2017, inter-segment sales and cost of sales of $4.09 million,
$ 3.5 million and $ 3.2 million between Calavo Foods and RFG were
eliminated.
The following table summarizes our net sales by business segment:
(Dollars in thousands)
2019
CHANGE
2018
CHANGE
2017
NE T SALES:
Fresh products
Calavo Foods
RFG
Total net sales
$
618,937
90,777
486,063
12.2%
$
551,654
(5.3)%
$
582,662
3.0%
8.3%
88,174
448,930
18.5%
7.3%
74,395
418,508
$
1,195,777
9.8%
$
1,088,758
1.2%
$
1,075,565
THIRD-PAR T Y SALES:
Avocados
Tomatoes
Papayas
Other fresh products
Prepared avocado products
Salsa
Fresh-cut fruit & vegetables
and prepared foods
$
569,779
$
—
$
40,879
10,931
1,353
—
—
—
—
—
—
100,842
3,252
—
Total gross sales
622,942
104,094
—
—
—
—
—
—
488,373
488,373
$
569,779
$
511,730
$
—
$
—
$
511,730
AS A PERCENTAGE OF NE T SALES:
40,879
10,931
1,353
100,842
3,252
488,373
31,608
11,699
498
—
—
—
—
—
—
99,635
3,423
—
—
—
—
—
31,608
11,699
498
99,635
3,423
—
451,203
451,203
1,215,409
555,535
103,058
451,203
1,109,796
Fresh products
Calavo Foods
RFG
51.8%
7.6%
40.6%
100%
50.7%
8.1%
41.2%
100%
54.2%
6.9%
38.9%
100%
Less sales incentives
(1,759)
(9,360)
(2,310)
(13,429)
(2,327)
(11,412)
(2,273)
(16,012)
Less inter-company
eliminations
(2,246)
(3,957)
—
(6,203)
(1,554)
(3,472)
—
(5,026)
Net sales
$
618,937
$
90,777
$
486,063
$
1,195,777
$
551,654
$
88,174
$
448,930
$ 1,088,758
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Summary
Net sales for the year ended October 31, 2019, as compared to 2018,
increased by $107.09 million, or 9.8%. The increase in sales, when
compared to the same corresponding prior year periods, is related to
growth from all reporting segments.
For fiscal year 2019, our Fresh products segment had our largest
percentage increase in sales, followed by our RFG segment and
Calavo Foods segment. The increase in Fresh products sales was due
primarily to an increase in the per unit selling price of avocados. The
increase in Calavo Foods sales was due primarily to increased sales
of our prepared avocado products. The increase in RFG sales was due
primarily to increased sales from fresh prepared food, fresh-cut fruit
and vegetable products. See discussion below for further details.
All three segments of our business are subject to seasonal trends,
which can impact the volume and/or quality of fruit sourced in any
particular quarter.
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. Additionally, net sales to third parties by
segment exclude sales between Avocados de Jalisco and the parent
company. All intercompany sales are eliminated in our consolidated
results of operations.
Fresh products
Fiscal 2019 vs. Fiscal 2018:
Net sales delivered by the Fresh products business increased
by approximately $ 67.2 million, or 12%, for the year ended
October 31, 2019, when compared to the same period for fiscal 2018.
This increase in Fresh product sales during the year ended 2019 was
primarily related to increased sales of avocados and tomatoes.
Sales of avocados increased $ 57.8 million, or 11%, for the year
ended October 31, 2019, when compared to the same prior year period.
The increase in avocado sales was primarily due to a 12% increase
in the average sales price per carton, compared to fiscal 2018. We
attribute much of the increase in price to the strong consumer demand
throughout the year, which exceeded available industry supply, as
well as an increase in our percentage of value-added cartons sold.
The increase in sales price per carton was partially offset by an
approximately 1%, or 2.3 million pound decrease in the volume of
avocados sold.
Sales of tomatoes increased to $ 39.9 million for the year ended
October 31, 2019, compared to $ 30.5 million for the same period for
fiscal 2018. The increase in sales for tomatoes is primarily due to
a 33% increase in volume of tomatoes sold during the year.
We anticipate that our sales volume of avocados will increase in
fiscal 2020, due to a larger expected all-source avocado crop, when
compared to the same prior year period.
Fiscal 2018 vs. Fiscal 2017:
Net sales delivered by the Fresh products business decreased
by approximately $ 31.09 million, or 5%, for the year ended
October 31, 2018, when compared to the same period for fiscal 2017.
This decrease in Fresh product sales during the year ended 2018 was
primarily related to decreased sales of avocados, partially offset by
increased sales of tomatoes.
Sales of avocados decreased $ 35.9 million, or 7%, for the year
ended October 31, 2018, when compared to the same prior year period.
Our volume of avocados sold during fiscal year 2018 increased by
57.7 million pounds, or 19%, compared to the prior year; however, this
increase in sales volume was significantly offset by a 22% decrease in
the average sales price per carton, when compared to the high market
prices experienced in fiscal 2017.
Sales of tomatoes increased to $ 30.5 million for the year ended
October 31, 2018, compared to $27.9 million for the same period for
fiscal 2017. The increase in sales for tomatoes is primarily due to an
approximately 7% increase in the average sales price per carton, in
addition to a 2% increase in volume of tomatoes sold during the year.
Calavo Foods
Fiscal 2019 vs. Fiscal 2018:
Sales for Calavo Foods for the year ended October 31, 2019, when
compared to the same period for fiscal 2018, increased $2.6 million, or
3%. Sales of prepared avocado products increased by approximately
$2.9 million, or 3%, primarily related to an increase in the average
selling price per pound, partially offset by a slight decrease in the
volume of products sold. Partially offsetting this gain were sales of
salsa products, which decreased by approximately $ 0.3 million during
the year.
Fiscal 2018 vs. Fiscal 2017:
Sales for Calavo Foods for the year ended October 31, 2018, when
compared to the same period for fiscal 2017, increased $13.8 million, or
19%. Sales of prepared avocado products increased by approximately
$14.4 million, or 20%, for the year ended October 31, 2018, when
compared to the same prior year period, resulting from increases in
both the average sales price per pound and the total volume of pounds
sold. Partially offsetting this gain were sales of salsa products, which
decreased by approximately $ 0.6 million during the year.
RFG
Fiscal 2019 vs. Fiscal 2018:
Sales for RFG for the year ended October 31, 2019, when compared
to the same period for fiscal 2018, increased $ 37.1 million, or 8%. The
overall increase in sales is primarily due to higher sales from expanded
retail partnerships in multiple geographies, most notably around
RFG’s new fresh food plant in Georgia (opened in April 2019). Partially
offsetting these gains were lower sales in one specific geographic
region related to issues that an RFG co-packer experienced during our
second quarter.
Fiscal 2018 vs. Fiscal 2017:
Sales for RFG for the year ended October 31, 2018, when compared
to the same period for fiscal 2017, increased $ 30.4 million, or 7%. The
overall increase in sales is primarily due to higher sales from expanded
retail partnerships in multiple geographies, most notably in a few
regions in which the Company has added production capacity.
C V G W / / 32-33
Gross Profit
The following table summarizes our gross profit and gross profit percentages by business segment:
2019
CHANGE
2018
CHANGE
2017
(Dollars in thousands)
GROSS PROFIT:
Fresh products
Calavo Foods
RFG
Total gross profit
GROSS PROFIT PERCENTAGES:
Fresh products
Calavo Foods
RFG
Consolidated
Summary
$
$
86,350
20,164
21,568
128,082
14.0%
22.2%
4.4%
10.7%
59.4%
$
(23.4)%
(34.9)%
54,160
26,313
33,143
(25.2)%
$
97.1%
15.0%
72,376
13,353
28,815
12.7%
$
113,616
(0.8)%
$
114,544
9.8%
29.8%
7.4%
10.4%
12.4%
17.9%
6.9%
10.6%
Our cost of goods sold consists predominantly of ingredient costs
(primarily fruit and other whole foods), packing materials, freight and
handling, labor and overhead (including depreciation) associated
with preparing food products, and other direct expenses pertaining to
products sold. Gross profit increased by approximately $14.5 million,
or 13%, for the year ended October 31, 2019, when compared to the
same period for fiscal 2018. The increase was primarily attributable to a
gross profit increase in our Fresh products segment, partially offset by
decreases in our Calavo Foods and RFG segments.
Fresh products
Fiscal 2019 vs. Fiscal 2018:
During our year ended October 31, 2019, as compared to the same
prior year period, the increase in our Fresh products segment gross
profit percentage was the result of increased profit for avocados.
For the year ended October 31, 2019, the gross profit percentage
for avocados increased to 14.3% from 9.7% in fiscal year 2018. The
increase during fiscal 2019 was related to improved efficiency in
several key areas across our production and distribution footprint,
which helped to complement the favorable market supply conditions
experienced in which consumer demand exceeded market supply.
Note that significant fluctuations in the exchange rate between the
U.S. Dollar and the Mexican Peso may have a material impact on future
gross profit for our Fresh products segment.
For the year ended October 31, 2019 we generated gross profit of
$4.3 million from tomato sales, up from $ 3.2 million in the corresponding
prior year period. The increase in tomato gross profit was due primarily
to the year-over-year increase in sales described in more detail earlier.
The majority of our tomato sales are done on a consignment basis, in
which the gross profit we earn is generally based on a commission
agreed to with each party, which usually is a percent of the overall
selling price; however, we also purchase some tomatoes on the spot
market to meet specific customer requests and have certain fixed
overhead costs associated with our tomato operations which impact
the overall gross profit realized from tomato sales. The gross profit
percentage for consignment sales are dependent on the volume of fruit
we handle, the average selling prices, and the competitiveness of the
returns that we provide to third-party growers/packers.
Fiscal 2018 vs. Fiscal 2017:
During our year ended October 31, 2018, as compared to the same
prior year period, the decrease in our Fresh products segment gross
profit percentage was the result of decreased profit for avocados,
partially offset by an increase in tomatoes. For the year ended October
31, 2018, compared to the same prior year period, the gross profit
percentage for avocados decreased to 9.7% in 2018 from 12.7% in 2017.
The decrease during fiscal 2018 was primarily related to the market
supply conditions experienced last year in which consumer demand
greatly exceeded market supply, and higher year-over-year freight
costs. Note that any significant fluctuations in the exchange rate
between the U.S. Dollar and the Mexican Peso may have a material
impact on future gross profits for our Fresh products segment.
For the year ended October 31, 2018 we generated gross profit of
$ 3.2 million from tomato sales, up from $2.7 million in the corresponding
prior year period. The increase in tomato gross profit was due primarily
to the year-over-year increase in sales described in more detail earlier.
Calavo Foods
Fiscal 2019 vs. Fiscal 2018:
Calavo Foods gross profit percentage decreased to 22.2% of net
sales, during the year ended October 31, 2019 compared to 29.8%
during the same prior year period. The decrease in Calavo Foods
gross profit percentage was due primarily to decreased gross profit
of our prepared avocado products. The decrease in gross profit and
margin for our prepared avocado products was due primarily to higher
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
raw material input costs during the year. Calavo Foods gross profit
percentage improved to 20.8% sequentially of net sales in the fourth
quarter of fiscal 2019 compared to 11.4% of net sales in the third quarter
of fiscal 2019. This improvement is primarily due to a decrease in raw
material input costs. Note that significant fluctuation in the cost of
fruit used in the production process or the exchange rate between the
U.S. Dollar and the Mexican Peso may have a material impact on future
gross profit for our Calavo Foods segments.
Fiscal 2018 vs. Fiscal 2017:
Calavo Foods gross profit percentage increased to 29.8% of net
sales, during the year ended October 31, 2018 compared to 17.9% during
the same prior year period. The increase in Calavo Foods gross profit
percentage was due primarily to increased gross profit of our prepared
avocado products. The increase in gross profit and margin for our
prepared avocado products was primarily due to higher sales, as well
as fruit costs that were below last year’s record-high fruit costs. Note
that any significant fluctuation in the cost of fruit used in the production
process or the exchange rate between the U.S. Dollar and the Mexican
Peso may have a material impact on future gross profit for our Calavo
Foods segments.
RFG
Fiscal 2019 vs. Fiscal 2018:
RFG’s gross profit percentage for the year ended October 31, 2019
was 4.4%, compared to 7.4% in the same prior year period. The raw
material issues described in detail during our first fiscal quarter
continued into a portion of our second fiscal quarter. In general,
raw material conditions improved during our third and fourth fiscal
quarters, and profitability in our second half far exceeded results from
the first half of our fiscal year, especially within RFG’s pre-existing
manufacturing operations (facilities opened more than one year).
Additionally, sales and gross profit in one specific geographic region
were significantly impacted as a result of issues experienced at RFG’s
co-packer servicing that region.
Fiscal 2018 vs. Fiscal 2017:
RFG’s gross profit percentage for the year ended October 31, 2018
was 7.4%, compared to 6.9% in the same prior year period. The gross
profit improvement for the year ended October 31, 2018, was due primarily
to higher net sales and manufacturing efficiencies generated across the
segment’s manufacturing footprint, as well as lower raw material costs.
Selling, General and Administrative
2019
CHANGE
2018
CHANGE
2017
(Dollars in thousands)
Selling, general and administrative
$
59,113
3.6%
$
57,081
0.8%
$
56,651
Percentage of net sales
4.9%
5.2%
5.3%
Selling, general and administrative expenses of $ 59.1 million
for the year ended October 31, 2019 include costs of marketing and
advertising, sales expenses (including broker commissions) and other
general and administrative costs. Selling, general and administrative
expenses increased by $2.09 million, or 3.6%, for the year ended
October 31, 2019, when compared to the same period for fiscal
2018. This increase was primarily related to an increase in accrued
management bonuses (approximately $1.5 million), increase in salaries
and benefits (approximately $ 0.8 million due primarily to higher
headcount), and transaction costs, including sales commission, related
to the sale of the Temecula packinghouse (approximately $ 0.4 million),
partially offset by a decrease of $1.09 million due to senior management
transition expenses recognized in the first quarter of fiscal 2018 related
to the stock grant issued to two officers who retired.
Selling, general and administrative expenses of $57.1 million for the
year ended October 31, 2018 include costs of marketing and advertising,
sales expenses (including broker commissions) and other general and
administrative costs, as well as $ 0.9 million of management transition
related expenses. Selling, general and administrative expenses
increased $ 0.4 million, or 1%, for the year ended October 31, 2018,
when compared to the same period for fiscal 2017. This increase was
primarily related to approximately $ 3.3 million increase in salaries and
benefits ($1.6 million of costs related to the vesting of stock grants
earned by certain members of the senior management team over the
past three fiscal years, as well as $1.7 million due in part to higher
headcount). Partially offsetting this increase was a decrease in bad
debt (approximately $1.3 million), a decrease in accrued management
bonuses (approximately $ 0.6 million) and a decrease in legal fees
(approximately $ 0.5 million) for year ended October 31, 2018, when
compared to the same period for fiscal 2017.
Income (loss) from Unconsolidated Entities
2019
CHANGE
2018
CHANGE
2017
(Dollars in thousands)
Income (loss) from unconsolidated entities
$
(14,082)
(18.8)% $
(11,850)
(3,055.1)% $
Percentage of net sales
(1.2)%
(1.1)%
401
—%
Income (loss) from unconsolidated entities includes our allocation
of earnings or losses from our investments in FreshRealm and Don
Memo. For the year ended October 31, 2019 and 2018, we recognized
$ 0.1 million and $ 0.2 million of income related to Don Memo. For the year
ended October 31, 2019 and 2018, we recognized $14.1 million of losses
and $12.09 million of losses related to FreshRealm. While we are unable
to determine with certainty the future operating results of FreshRealm
and future non-Calavo investments, if any, we anticipate recording
additional non-cash losses from FreshRealm during fiscal 2020. See
Note 16 in our consolidated financial statements for more information.
C V G W / / 34-35
Interest Income
(Dollars in thousands)
Interest income
Percentage of net sales
2019
CHANGE
2018
CHANGE
2017
$
2,675
0.2%
741.2% $
318
—%
1,225.0% $
24
—%
The increase in interest income in fiscal 2019 as compared to 2018
is primarily due to the loans to FreshRealm in fiscal 2019. The increase
in interest income in fiscal 2018 as compared to 2017 is primarily due to
the loans to FreshRealm in fiscal 2018. See the related party footnote
in our consolidated financial statements for further information.
Interest Expense
(Dollars in thousands)
Interest expense
Percentage of net sales
2019
CHANGE
2018
CHANGE
2017
$
948
0.1%
14.1% $
831
0.1%
(18.8)% $
1,023
0.1%
Interest expense is primarily generated from our line of credit
borrowings with Farm Credit West, PCA (FCW) and Bank of America,
N.A. (Bank of America). For fiscal 2019, as compared to fiscal 2018,
the increase in interest expense was primarily related to higher LIBOR
interest rates, offset by a lower average debt balance. For fiscal 2018,
as compared to fiscal 2017, the decrease in interest expense was
primarily related to lower average debt balance, offset by higher LIBOR
interest rates.
Other Income, Net
(Dollars in thousands)
Other income, net
Percentage of net sales
2019
CHANGE
2018
CHANGE
2017
$
499
0.0%
(10.7)% $
559
0.1%
16.7% $
479
0.0%
Other income, net includes dividend income, as well as certain
other transactions that are outside of the normal course of operations.
During fiscal 2019, 2018 and 2017, we received $ 0.5 million, $ 0.4 million
and $ 0.4 million as dividend income from Limoneira.
Provision for Income Taxes
(Dollars in thousands)
Provision for income taxes
Effective tax rate
2019
CHANGE
2018
CHANGE
2017
$
12,882
1.3% $
12,719
(37.8)% $
20,450
26.0%
28.4%
36.3%
Our tax provision is determined using an estimated annual effective
tax rate and adjusted for discrete taxable events that may occur during
the quarter. We recognize the effects of tax legislation in the period
in which the law is enacted. Our deferred tax assets and liabilities
are remeasured using enacted tax rates expected to apply to taxable
income in the years we estimate the related temporary differences to
reverse.
On December 22, 2017, the President of the United States signed
and enacted comprehensive tax legislation into law H.R. 1, commonly
referred to as the Tax Cuts and Jobs Act (the “Tax Act”). Except for
certain provisions, the Tax Act was effective for tax years beginning
on or after January 1, 2018. As a fiscal year U.S. taxpayer with an
October 31 fiscal year end, the majority of the new provisions, such as
eliminating the domestic manufacturing deduction, cre ating new taxes
on certain foreign sourced income and introducing new limitations on
certain business deductions, did not apply until our 2019 fiscal year.
In the prior fiscal period 2018, the most significant impacts
included: lowering of the U.S. federal corporate income tax rate;
remeasuring certain net deferred tax assets and liabilities; and
requiring the transition tax on the deemed repatriation of certain
foreign earnings. In the first quarter of fiscal 2018, we recorded
$1.7 million in one-time, non-cash charges related to the revaluation
of our net deferred tax assets (approximately $1.4 million) and
the transition tax on the deemed repatriation of foreign earnings
(approximately $ 0.3 million). In addition, we recorded an income tax
benefit of approximately $ 0.4 million for the first quarters of fiscal 2018,
pursuant to ASU 2016-09, Improvements to Employee Share-based
Payment Accounting. Based on the Tax Act and a change accelerating
certain tax deductions on our 2017 federal tax return, we recorded
$ 0.8 million of a tax benefit as a discrete item during our third fiscal
quarter of 2018. Many of these one-time charges did not recur in 2019.
Additionally, we recorded approximately $ 0.2 million of tax expense
related to return to provision differences upon the filing of the 2018 and
2017 tax returns during our third quarter of fiscal quarters of 2019 and 2018.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Net loss (income) attributable to noncontrolling interest
2019
CHANGE
2018
CHANGE
2017
(Dollars in thousands)
Net loss (income) attributable to noncontrolling interest
$
Percentage of net sales
60
0.0%
(77.7)% $
269
0.0%
598.1%
$
(54)
0.0%
For fiscal years 2019 and 2018, the net losses attributable to
noncontrolling interest is due to losses from Avocados de Jalisco.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of
the eight fiscal quarters in the period ended October 31, 2019. The
information for each of these quarters is derived from our unaudited
interim financial statements and should be read in conjunction with
our audited consolidated financial statements included in this Annual
Report. In our opinion, all necessary adjustments, which consist only of
normal and recurring accruals, have been included to fairly present our
unaudited quarterly results.
OCT. 31,
2019
JULY 31,
2019
APR. 30,
2019
JAN. 31,
2019
OCT. 31,
2018
JULY 31,
2018
APR. 30,
2018
JAN. 31,
2018
THREE MONTHS ENDED
$
292,176 $
359,333 $
286,236 $
258,032 $
280,005 $
296,419 $
264,405 $
247,928
267,543
24,633
323,558
35,775
249,399
36,837
227,195
30,837
257,738
22,267
263,349
33,070
232,436
31,969
221,618
26,310
75
75
1,927
—
—
—
—
—
14,885
9,823
14,295
21,555
(1,460)
(5,116)
9,104
1,789
(2,138)
5,177
17,147
3,987
(2,510)
10,650
15,657
23,107
1,359
521
24,987
5,573
(3,136)
16,278
14,276
16,561
(4,505)
256
12,312
1,533
(6,298)
4,481
14,796
7,471
—
(131)
7,340
250
(8,451)
(1,361)
13,893
19,177
—
271
19,448
3,403
(3,677)
12,368
12,875
19,094
—
11
19,105
4,764
(325)
14,016
15,517
10,793
—
(105)
10,688
4,302
603
6,989
Other income (expense), net
741
708
Income before provision for
income taxes and income (loss)
from unconsol. entities
(in thousands, except per share amounts)
STATEMENT OF
INCOME DATA
Net sales
Cost of sales
Gross profit
Gain on sale of
Temecula packinghouse
Selling, general
and administrative
Operating income
Gains (losses) on
Limoneira shares
Provision for income taxes
Income (loss) from
unconsolidated entities
Net income
Add: Net (income) loss –
noncontrolling interest
Net income (loss) –
Calavo Growers, Inc
Basic
Diluted
Number of shares used in
per share computation:
Basic
Diluted
C V G W / / 36-37
LIQUIDITY AND CAPITAL RESOURCES
Operating activities for fiscal 2019, 2018 and 2017 provided cash
flows of $72.1 million, $48.4 million and $ 62.1 million. Fiscal year
2019 operating cash flows reflect our net income of $ 36.6 million, net
increase of noncash charges (depreciation and amortization, income/
(loss) from unconsolidated entities, provision for losses on accounts
receivable, deferred income taxes, loss on disposal of fixed assets,
net losses on Limoneira stock, and stock compensation expense)
of $ 37.8 million and a net decrease from changes in the non-cash
components of our working capital accounts of approximately
$2.3 million.
Fiscal year 2019 decreases in operating cash flows, caused by
working capital changes, includes an increase in other assets of
$ 5.09 million, an increase in prepaid expenses and other current assets
of $2.5 million, an increase in inventory of $1.8 million, an increase
in advances to suppliers of $1.09 million, and a decrease in payable
to growers of $ 0.5 million, partially offset by, an increase in trade
accounts payable, accrued expenses, and other long-term liabilities
of $4.2 million, a decrease in accounts receivable of $2.7 million, an
increase in deferred rent of $1.09 million and a decrease in income tax
receivable of $ 0.7 million.
The increase in other assets is due to an increase in Mexican IVA
tax receivable (see Note 15 to our consolidated condensed financial
statements). The increase in our inventory balance is primarily
related to an increase in the volume of avocado pounds on hand at
October 31, 2019 as compared to the same prior year period, as well
as increased RFG raw material inventories as a greater percentage
of production moves to in-house facilities. The increase in advances
to suppliers is mainly due to an increase in advances to our tomato
growers in fiscal 2019 compared to fiscal 2018. The decrease in payable
to our growers primarily reflects a decrease in our Peruvian avocado
grower payable due to an earlier end to the Peruvian season in 2019
compared to 2018. The increase in accounts payable and accrued
expenses is primarily related to an increase in our payables related to
RFG, as well as higher accrued bonuses. The decrease in our accounts
receivable, as of October 31, 2019 when compared to October 31, 2018,
primarily reflects an improvement in days of sales outstanding in
October 2019, as compared to October 2018.
Cash used in investing activities was $ 31.9 million, $ 30.2 million
and $ 53.7 million for fiscal years 2019, 2018, and 2017. Fiscal year 2019
cash flows used in investing activities include notes to FreshRealm
of $23.8 million, and property, plant and equipment purchases of
$16.7 million, partially offset by proceeds received on the sale of the
Temecula packinghouse of $7.1 million, by proceeds received on the
sales of Limoneira stock of $1.2 million and proceeds received from the
repayment of the San Rafael note of $ 0.4 million.
Cash used in financing activities was $ 33.8 million, $23.3 million
and $15.7 million for fiscal years 2019, 2018 and 2017. Cash used during
fiscal year 2019 primarily relates to the payment of our $17.6 million
dividend, payments on our credit facilities totaling $15.09 million, the
payment of minimum withholding taxes on net share settlement of
equity awards of $1.09 million and payments on long-term debt.
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
October 31, 2019 and 2018 totaled $ 8.09 million and $1.5 million. Our
working capital at October 31, 2019 was $ 36.9 million, compared to
$29.6 million at October 31, 2018.
We believe that cash flows from operations and the available Credit
Facility will be sufficient to satisfy our future capital expenditures,
grower recruitment efforts, working capital and other financing
requirements for at least the next twelve months. We will continue to
evaluate grower recruitment opportunities, expanded relationships
with retail and club customers, and exclusivity arrangements with food
service companies to fuel growth in each of our business segments. We
have a revolving credit facility with Bank of America as administrative
agent and Merrill Lynch, Pierce, Fenner & Smith Inc. as joint lead
arranger and sole bookrunner, and Farm Credit West, as joint lead
arranger. Under the terms of this agreement, we are advanced funds for
both working capital and long-term productive asset purchases. Total
credit available under this agreement is $ 80 million, and will expire in
June 2021. Upon notice to Bank of America, we may from time to time,
request an increase in the Credit Facility by an amount not exceeding
$50 million. For our line of credit the weighted-average interest rate was
3.8% and 3.4% at October 31, 2019 and 2018. Under this credit facility,
there was nothing outstanding as of October 31, 2019 and we had
$15.09 million outstanding as of October 31, 2018.
This Credit Facility contains customary affirmative and negative
covenants for agreements of this type, including the following financial
covenants applicable to the Company and its subsidiaries on a
consolidated basis: (a) a quarterly consolidated leverage ratio of not
more than 2.50 to 1.00 and (b) a quarterly consolidated fixed charge
coverage ratio of not less than 1.15 to 1.00. We were in compliance with
all such covenants at October 31, 2019.
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 October 31, 2019:
34
(47)
67
6
31
(18)
106
150
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
$
$
$
5,211
0.30
0.30
$
$
$
10,603
0.61
0.60
$
$
$
16,345
0.93
0.93
$
$
$
4,487
0.26
0.26
$
$
$
(1,330) $
12,350
(0.08) $
(0.08) $
0.71
0.70
$
$
$
14,122
0.81
0.80
$
$
$
7,139
0.41
0.41
17,525
17,604
17,525
17,605
17,530
17,609
17,500
17,558
17,482
17,581
17,481
17,581
17,481
17,580
17,446
17,525
(in thousands)
Long-term debt obligations (including interest)
Defined benefit plan
Operating lease commitments
Total
TOTAL
LESS THAN
1 YEAR
1-3 YEARS
3-5 YEARS
MORE THAN
5 YEARS
$
$
7,340
$
907
$
1,823
$
1,448
$
119
87,476
34
8,627
68
15,856
17
15,359
94,935
$
9,568
$
17,747
$
16,824
$
3,162
—
47,634
50,796
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
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.
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.
Recently Adopted Accounting Pronouncements
In January 2016, the FASB issued an ASU, which requires equity
investments (except those accounted for under the equity method of
accounting) to be measured at fair value with changes in fair value
recognized in net income. The Company adopted this new standard at
the beginning of fiscal 2019. With the adoption of this new standard,
we reclassed unrealized gains of $12.1 million in accumulated other
comprehensive income to retained earnings as of November 1, 2018.
Additionally, for the year ended October 31, 2019, we sold 51,271
shares of Limoneira stock and recorded a loss of $ 0.1 million in
our consolidated statements of income. Limoneira’s stock price at
October 31, 2019, and October 31, 2018 equaled $18.92 per share, and
$24.65 per share. Our remaining shares of Limoneira stock, totaling
1,677,299, were revalued to $18.92 per share at October 31, 2019
and, as a result, we recorded a loss of $ 9.6 million for the year ended
October 31, 2019 in our consolidated condensed statements of income.
In May 2014, the FASB issued a comprehensive new revenue
recognition standard which superseded previous existing revenue
recognition guidance. The standard is intended to clarify the principles
of recognizing revenue and create common revenue recognition
guidance between U.S. GAAP and International Financial Reporting
Standards. The standard also requires expanded disclosures
surrounding revenue recognition. During fiscal 2017, the FASB issued
additional clarification guidance on the new revenue recognition
standard which also included certain scope improvements and
practical expedients. The Company adopted this new standard at the
beginning of fiscal 2019 using the modified retrospective transition
method, under which the cumulative effect of initially applying the
new guidance is recognized as an adjustment to the opening balance
of retained earnings on the first day of our 2019 fiscal year. The
adoption of the amendment did not have an impact on the Company’s
consolidated financial statements.
Recently Issued Accounting Standards
In October 2018, the FASB issued ASU 2018-17, Targeted
Improvements to Related Party Guidance for Variable Interest Entities.
This ASU provides that indirect interests held through related parties in
common control arrangements should be considered on a proportional
basis for determining whether fees paid to decision makers and
service providers are variable interests. The new guidance is effective
for fiscal years beginning after December 15, 2019. This ASU will be
effective for us beginning the first day of our 2021 fiscal year. We are
evaluating the impact of the adoption of this ASU on our financial
condition, results of operations and cash flows, and, as such, we are
not able to estimate the effect the adoption of the new standard will
have on our financial statements.
In September 2018, the FASB issued and ASU, Intangibles-Goodwill
and Other-Internal-Use Software (Subtopic 350-40), Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract. This ASU requires implementation
costs incurred by customers in cloud computing arrangements (i.e.,
hosting arrangements) to be capitalized under the same premises of
authoritative guidance for internal-use software and deferred over
the non-cancellable term of the cloud computing arrangements plus
any option renewal periods that are reasonably certain to be exercised
by the customer or for which the exercise is controlled by the service
provider. This ASU will be effective for us beginning the first day of our
2021 fiscal year. We are evaluating the impact of the adoption of this
ASU on our financial condition, results of operations and cash flows,
and, as such, we are not able to estimate the effect the adoption of the
new standard will have on our financial statements.
In June 2018, the FASB issued an ASU, Improvements to Nonemployee
Share-Based Payment Accounting. The FASB is issuing this update to
simplify the accounting for share-based payments to nonemployees
by aligning it with the accounting for share-based payments to
employees, with certain exceptions. This ASU will be effective for us
beginning the first day of our 2020 fiscal year. We do not expect that the
adoption of this ASU to have an impact on our financial statements.
In February 2018, the FASB issued an ASU, Reclassification of
Certain Tax Effects From Accumulated Other Comprehensive Income,
which amends Accounting Standards Codification (“ASC”) 220, Income
Statement — Reporting Comprehensive Income, to allow a reclassification
from accumulated other comprehensive income to retained earnings
for stranded tax effects resulting from the Tax Cuts and Jobs Act, (the
“Act”). In addition, under the ASU, an entity will be required to provide
certain disclosures regarding stranded tax effects. This ASU is effective
for us the first day of our 2020 fiscal year. We do not expect that the
adoption of this ASU to have an impact on our financial statements.
In January 2017, the FASB issued an ASU, Simplifying the Test for
Goodwill Impairment, which removes the requirement to compare the
implied fair value of goodwill with its carrying amount as part of step 2
of the goodwill impairment test. The ASU permits an entity to perform
its annual, or interim, goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount and to recognize an
impairment charge for the amount by which the carrying amount exceeds
the reporting unit’s fair value; however, the loss recognized should not
exceed the total amount of goodwill allocated to that reporting unit. This
ASU will be effective for us beginning the first day of our 2021 fiscal year
and is not expected to have a significant impact upon adoption.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments
– Measurement of Credit Losses on Financial Instruments, and
subsequent amendments to the guidance, ASU 2018-19 in November
2018 and ASU 2019-05 in May 2019 including codification improvements
to Topic 326 in ASU 2019-04. The standard significantly changes
how entities will measure credit losses for most financial assets and
certain other instruments that aren’t measured at fair value through
net income. The standard will replace today’s “incurred loss” approach
with an “expected loss” model for instruments measured at amortized
cost. For available-for-sale debt securities, entities will be required
to record allowances rather than reduce the carrying amount, as they
do today under the other-than-temporary impairment model. It also
simplifies the accounting model for purchased credit-impaired debt
securities and loans. The amendment will affect loans, debt securities,
trade receivables, net investments in leases, off balance sheet
credit exposures, reinsurance receivables, and any other financial
C V G W / / 38-39
assets not excluded from the scope that have the contractual right
to receive cash. ASU 2018-19 clarifies that receivables arising from
operating leases are accounted for using lease guidance and not as
financial instruments. ASU 2019-05 provides entities that have certain
instruments with an option to irrevocably elect the fair value option.
The amendments should be applied on either a prospective transition
or modified-retrospective approach depending on the subtopic. This
ASU will be effective for us beginning the first day of our 2021 fiscal
year. Early adoption is permitted. We are evaluating the impact of the
adoption of this ASU on our financial condition, results of operations
and cash flows, and, as such, we are not able to estimate the effect the
adoption of the new standard will have on our financial statements.
In February 2016, the FASB issued an ASU, Leases, which requires
a dual approach for lessee accounting under which a lessee would
account for leases as finance leases or operating leases. Both finance
leases and operating leases will result in the lessee recognizing a
right-of use asset (ROU) and a corresponding lease liability. For finance
leases, the lessee would recognize interest expense and amortization
of the right-of-use asset, and for operating leases, the lessee would
recognize a straight-line total lease expense. The guidance also
requires qualitative and specific quantitative disclosures to supplement
the amounts recorded in the financial statements so that users can
understand more about the nature of an entity’s leasing activities,
including significant judgments and changes in judgments. This ASU will
be effective for us beginning the first day of our 2020 fiscal year.
The new standard provides a number of optional practical
expedients in transition. We expect to elect the ‘package of practical
expedients’, which permits us not to reassess under the new standard
our prior conclusions about lease identification, lease classification
and initial direct costs. We do not expect to elect the use-of-hindsight
or the practical expedient pertaining to land easements; the latter not
being applicable to us. We expect to elect all of the new standard’s
available transition practical expedients.
We will elect the alternative modified retrospective approach,
applying ASC 840 to all comparative periods, including disclosures,
and recognize the effects of applying ASC 842 as a cumulative-
effect adjustment to retained earnings as of the effective date. Upon
adoption, the most significant effects are expected to relate to (1) the
recognition of new ROU assets and lease liabilities on our balance
sheet for our operating leases, which is expected to be between
$ 60 million and $70 million at the beginning of fiscal 2020; and (2)
providing significant new disclosures about our leasing activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents,
accounts receivable, payable to growers, accounts payable, current
and long-term borrowings pursuant to our credit facilities with financial
institutions, and long-term, fixed-rate obligations. All of our financial
instruments are entered into during the normal course of operations
and have not been acquired for trading purposes. The table below
summarizes interest rate sensitive financial instruments and presents
principal cash flows in U.S. dollars, which is our reporting currency,
and weighted-average interest rates by expected maturity dates, as of
October 31, 2019.
EXPECTED MATURITY DATE OCTOBER 31,
2020
2021
2022
2023
2024
THEREAFTER
TOTAL
FAIR VALUE
(All amounts in thousands)
ASSE TS
Cash and cash equivalents(1)
$
7,973
$
Accounts receivable(1)
Notes receivable
from FreshRealm(2)
LIABILITIES
63,423
—
Payable to growers(1)
$
13,463
$
Accounts payable(1)
Current borrowings pursuant
to credit facilities(1)
Fixed-rate long-term obligations(3)
17,421
—
762
$
$
—
—
—
—
—
—
803
$
—
—
35,241
$
—
—
—
795
$
$
—
—
—
—
—
—
749
$
$
—
—
—
—
—
—
527
—
—
—
—
—
—
2,538
$
7,973
$
63,423
7,973
63,423
—
35,241
$
13,463
$
17,421
—
6,174
13,463
17,421
—
6,249
(1) We believe the carrying amounts of cash and cash equivalents, accounts receivable, advances to suppliers, payable to growers, accounts payable, and current
borrowings pursuant to credit facilities approximate their fair value due to the short maturity of these financial instruments.
(2) The notes to FreshRealm, as of October 31, 2019, bear interest at the rate of 10% annually, with monthly interest payments scheduled to begin on October 31, 2020. This
first interest payment would represent interest due for the month of October 2020 only, with similar monthly payments scheduled to follow afterwards. The due date of
the notes is November 1, 2021, with the Company having the option of up to two, one-year extensions (i.e. first to November 1, 2022, then to November 1, 2023).
(3) Fixed-rate long-term obligations bear interest rates ranging from 3.5% to 3.6% with a weighted-average interest rate of 3.6%. We project the impact of an increase or
decrease in interest rates of 100 basis points would result in a change of fair value of approximately $310,000.
We were not a party to any derivative instruments during the
fiscal year. It is currently our intent not to use derivative instruments
for speculative or trading purposes. Additionally, we do not use any
hedging or forward contracts to offset market volatility.
Our Mexican-based operations transact a significant portion of
business in Mexican pesos. Funds are transferred by our corporate
office to Mexico on a weekly basis to satisfy domestic cash needs.
We do not currently use derivative instruments to hedge fluctuations
in the Mexican peso to U.S. dollar exchange rates. Management does,
however, evaluate this opportunity from time to time. Total foreign
currency translation losses for fiscal years 2019, 2018, and 2017, net of
gains, were $ 0.3 million, $ 0.8 million and $ 0.3 million.
Consolidated Balance Sheets
Consolidated Statements of Income
C V G W / / 40-41
OCTOBER 31,
(in thousands)
ASSE TS
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $3,366 (2019) $3,227 (2018)
Inventories, net
Prepaid expenses and other current assets
Advances to suppliers
Income taxes receivable
Total current assets
Property, plant, and equipment, net
Investment in Limoneira Company
Investments in unconsolidated entities
Deferred income taxes
Goodwill
Notes receivable from FreshRealm
Other assets
2019
2018
YEAR ENDED OCTOBER 31,
2019
2018
2017
$
7,973
63,423
36,889
9,027
7,338
2,865
127,515
132,098
31,734
10,722
3,447
18,262
35,241
31,341
$
1,520
66,143
35,044
16,727
5,555
3,521
128,510
122,143
42,609
24,805
4,377
18,262
—
27,030
(in thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative
Gain on sale of Temecula packinghouse
Operating income
Interest income
Interest expense
Other income, net
Unrealized and realized net loss on Limoneira shares
Income before provision for income taxes and loss
from unconsolidated entities
Provision for income taxes
Net income (loss) from unconsolidated entities
Net income
$
390,360
$
367,736
Less: Net loss (income) attributable to noncontrolling interest
$
1,195,777
$
1,088,758
$
1,075,565
1,067,695
128,082
59,113
2,077
71,046
2,675
(948)
499
(9,722)
63,550
12,882
(14,082)
36,586
60
975,142
113,616
57,081
—
56,535
318
(831)
559
—
56,581
12,719
(11,850)
32,012
269
961,021
114,544
56,651
—
57,893
24
(1,023)
479
—
57,373
20,450
401
37,324
(54)
LIABILITIES AND SHAREHOLDERS’ EQUIT Y
Net income attributable to Calavo Growers, Inc.
$
36,646
$
32,281
$
37,270
Current Liabilities:
Payable to growers
Trade accounts payable
Accrued expenses
Short-term borrowings
Dividend payable
Current portion of long-term obligations
Total current liabilities
Long-term Liabilities:
Long-term obligations, less current portion
Deferred rent
Other long-term liabilities
Total long-term liabilities
Commitments and contingencies
Shareholders’ Equity:
Common stock ($0.001 par value, 100,000 shares authorized;
17,595 (2019) and 17,567 (2018) shares issued and outstanding)
Additional paid-in capital
Accumulated other comprehensive income
Noncontrolling interest
Retained earnings
Total shareholders’ equity
$
$
13,463
17,421
39,629
—
19,354
762
90,629
5,412
3,681
4,769
13,862
18
161,606
—
1,688
122,557
285,869
390,360
$
$
14,001
13,735
38,521
15,000
17,568
118
98,943
314
2,678
842
3,834
18
157,928
12,141
1,748
93,124
264,959
367,736
CAL AVO GROW ERS, INC.’S NE T INCOME
PER SHARE :
Basic
Diluted
NUMBER OF SHARES USED IN
PER SHARE COMPUTATION :
Basic
Diluted
$
$
2.09
2.08
$
$
1.85
1.84
$
$
2.14
2.13
17,519
17,593
17,477
17,568
17,416
17,514
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
C V G W / / 42-43
2019
2018
2017
COMMON STOCK
SHARES
AMOUNT
ADDITIONAL
PAID-IN
CAPITAL
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
RETAINED
EARNINGS
NON-
CONTROLLING
INTEREST
TOTAL
$
36,586
$
32,012
$
37,324
(in thousands)
Balance, October 31, 2016
17,440
$
17
$
149,748
$
6,544
$
57,798
$
962
$
215,069
YEAR ENDED OCTOBER 31,
(in thousands)
Net income
Other comprehensive income, before tax:
Unrealized investment gains
Income tax expense related to items of other
comprehensive income
Other comprehensive income, net of tax
Comprehensive income
Less: Net loss (income) attributable to noncontrolling interest
—
—
—
36,586
60
2,247
(540)
1,707
33,719
269
6,327
(2,437)
3,890
41,214
(54)
Comprehensive income – Calavo Growers, Inc.
$
36,646
$
33,988
$
41,160
Exercise of stock options and
income tax benefit
Stock compensation expense
Restricted stock issued
Unrealized gain on Limoneira
investment, net
Dividend declared to shareholders
Salsa Lisa contingent
consideration adjustment
Avocados de Jalisco
noncontrolling interest
Net income attributable to
Calavo Growers, Inc
2
—
91
—
—
—
—
—
Balance, October 31, 2017
17,533
Exercise of stock options and
income tax benefit
Stock compensation expense
Restricted stock issued
Unrealized gain on Limoneira
investment, net
Dividend declared to shareholders
Noncash transfer of
noncontrolling interest
Avocados de Jalisco
noncontrolling interest
Net income attributable to
Calavo Growers, Inc.
3
—
31
—
—
—
—
—
Balance, October 31, 2018
17,567
Exercise of stock options and
income tax benefit
Stock compensation expense
Restricted stock issued
Unrealized gains on Limoneira
investment reclassed to
retained earnings
Dividend declared to shareholders
Avocados de Jalisco
noncontrolling interest
Net income attributable to
Calavo Growers, Inc.
4
—
24
—
—
—
—
—
1
—
—
—
—
—
18
—
—
—
—
—
—
—
—
18
—
—
—
—
—
—
404
3,148
1,172
—
—
(229)
—
—
—
—
—
3,890
—
—
—
—
154,243
10,434
53
3,742
891
—
—
(1,001)
—
—
—
—
—
1,707
—
—
—
—
157,928
12,141
85
3,593
—
—
—
—
—
—
—
(12,141)
—
—
—
—
—
—
(16,657)
—
—
37,270
78,411
—
—
—
—
(17,568)
—
—
32,281
93,124
—
—
—
12,141
(19,354)
—
—
—
—
—
—
54
—
1,016
—
—
—
—
—
404
3,148
1,173
3,890
(16,657)
(229)
54
37,270
244,122
53
3,742
891
1,707
(17,568)
1,001
—
(269)
(269)
—
1,748
—
—
—
—
—
32,281
264,959
85
3,593
—
—
(19,354)
—
(60)
(60)
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Balance, October 31, 2019
17,595
$
18
$
161,606
$
—
$
122,557
$
1,688
$
285,869
—
—
—
—
36,646 —
36,646
Consolidated Statements of Cash Flows
C V G W / / 44-45
YEAR ENDED OCTOBER 31,
(in thousands)
CASH FLOWS FROM OPER ATING AC TIVITIES:
2019
2018
2017
YEAR ENDED OCTOBER 31,
2019
2018
2017
(in thousands)
CASH FLOWS FROM FINANCING AC TIVITIES:
Net income
$
36,586
$
32,012
$
37,324
Payment of dividend to shareholders
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Provision for losses (gains) on accounts receivable
Net loss from unconsolidated entities
Unrealized and realized net loss on Limoneira shares
Interest income on notes to FreshRealm
Stock-based compensation expense
Gain on sale of Temecula packinghouse
Loss on disposal of property, plant, and equipment
Deferred income taxes
Effect on cash of changes in operating assets and liabilities:
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Advances to suppliers
Income taxes receivable/payable
Other assets
Payable to growers
Deferred rent
Trade accounts payable, accrued expenses and other
long-term liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING AC TIVITIES:
Acquisitions of and deposits on property, plant, and equipment
Investment in unconsolidated entities
Proceeds received for repayment of San Rafael note
Proceeds received from Limoneira stock sales
Proceeds from sale of Temecula packinghouse
Infrastructure advance to Agricola Belher
Notes receivables advanced to FreshRealm
Proceeds received for repayment of loan to FreshRealm
Investment in Agricola Don Memo
Net cash used in investing activities
13,633
35
14,082
9,722
(2,435)
3,593
(2,077)
304
930
2,685
(1,845)
(2,508)
(983)
656
(4,991)
(538)
1,004
4,246
72,099
(16,721)
—
417
1,154
7,100
—
(23,800)
—
—
(31,850)
13,042
(10)
11,851
—
—
4,633
—
121
4,866
3,617
(4,186)
(729)
(1,009)
(2,144)
(3,118)
(2,524)
(54)
(7,942)
48,426
(15,004)
(3,500)
436
—
—
(3,000)
(11,500)
2,500
(136)
(30,204)
10,691
1,230
(401)
—
—
4,320
—
74
2,725
(879)
991
(1,447)
79
(1,043)
(2,362)
(4,239)
425
14,652
62,140
(44,510)
(9,067)
409
—
—
—
—
—
(500)
(53,668)
Proceeds from revolving credit facility
Payments on revolving credit facility
Payments of minimum withholding taxes on
net share settlement of equity awards
Purchase of noncontrolling interest of Salsa Lisa
Payments on long-term obligations
Proceeds from stock option exercises
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
SUPPLEMENTAL INFORMATION :
Cash paid during the year for:
Interest
Income taxes
NONCASH INVESTING AND FINANCING AC TIVITIES:
Declared dividends payable
Acquisitions of property, plant, and equipment with capital lease
Capital lease related to Temecula packinghouse
Property, plant, and equipment included in trade accounts payable
and accrued expenses
Collection for Agricola Belher Infrastructure Advance
Unrealized investment gain
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
(17,568)
212,500
(227,500)
(1,008)
—
(305)
85
(33,796)
6,453
1,520
7,973
1,108
10,224
19,354
2,827
3,306
2,059
800
—
$
$
$
$
$
$
$
$
$
(16,657)
278,500
(283,500)
(1,587)
—
(136)
53
(23,327)
(5,105)
6,625
1,520
874
9,262
17,568
—
—
946
200
2,247
$
$
$
$
$
$
$
$
$
(15,696)
163,500
(162,500)
—
(1,000)
(58)
65
(15,689)
(7,217)
13,842
6,625
1,094
17,011
16,657
8,368
—
1,833
200
6,326
$
$
$
$
$
$
$
$
$
Notes To Consolidated Financial Statements
1. DESCRIPTION OF THE BUSINESS
Prepaid Expenses and Other Current Assets
Business
Calavo Growers, Inc. (Calavo, the Company, we, us or our), is a
global leader in the avocado industry and a provider of value-added
fresh food. Our expertise in marketing and distributing avocados,
prepared avocados, and other perishable foods allows us to deliver
a wide array of fresh and prepared food products to retail grocery,
foodservice, club stores, mass merchandisers, food distributors
and wholesalers on a worldwide basis. We procure avocados from
California, Mexico and other growing regions around the world.
Through our various operating facilities, we (i) sort, pack, and/or ripen
avocados, tomatoes and/or Hawaiian grown papayas, (ii) create,
process and package a portfolio of healthy fresh foods including
fresh-cut fruit and vegetables, and prepared foods and (iii) process
and package guacamole and salsa. We distribute our products both
domestically and internationally and report our operations in three
different business segments: Fresh products, Calavo Foods and
Renaissance Food Group (RFG).
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements were
prepared in accordance with accounting principles generally accepted
in the U.S.
Our consolidated financial statements include the accounts of
Calavo Growers, Inc. and our wholly owned subsidiaries, Calavo de
Mexico S.A. de C.V. (Calavo de Mexico), Calavo Foods de Mexico S.A.
de C.V., Calavo Growers de Mexico, S. de R.L. de C.V. ( Calavo Growers
de Mexico), Maui Fresh International, Inc. (Maui), Hawaiian Sweet,
Inc. (HS), Hawaiian Pride, LLC (HP), Calavo Salsa Lisa, LLC (CSL),
Avocados de Jalisco, S.A.P.I. de C.V. (Avocados de Jalisco), in which
we have an 83 percent ownership interest, and RFG. All intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Among the significant estimates affecting the
financial statements are those related to valuation allowances for
valuation allowances for accounts and notes receivable, goodwill,
grower advances, inventories, long-lived assets, valuation of and
estimated useful lives of identifiable intangible assets, stock-based
compensation, promotional allowances and income taxes. On an
ongoing basis, management reviews its estimates based upon
currently available information. Actual results could differ materially
from those estimates.
Cash and Cash Equivalents
We consider all highly liquid financial instruments purchased with
an original maturity date of three months or less to be cash equivalents.
The carrying amounts of cash and cash equivalents approximate their
fair values.
Prepaid expenses and other current assets consist primarily
of non-trade receivables, infrastructure advances and prepaid
expenses. Non-trade receivables were $ 5.3 million and $4.9 million
at October 31, 2019 and 2018. Included in non-trade receivables are
$1.9 million and $1.5 million related to the current portion of non-CDM
Mexican IVA (i.e. value-added) taxes at October 31, 2019 and 2018 (See
Note 15). Infrastructure advances are discussed below. In addition,
at October 31, 2018, loans of $ 9.09 million to FreshRealm are included
in prepaid expenses and other current assets (See Note 8). Prepaid
expenses totaling $ 3.4 million and $2.8 million at October 31, 2019 and
2018, are primarily for insurance, rent and other items.
Inventories
Inventories are stated at the lower of cost or net realizable value.
Cost is computed on a monthly weighted-average basis, which
approximates the first-in, first-out method; market is based upon
estimated replacement costs. Costs included in inventory primarily
include the following: fruit, picking and hauling, overhead, labor,
materials and freight.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and depreciated
over their estimated useful lives using the straight-line method.
Leasehold improvements are stated at cost and amortized over the
lesser of their estimated useful lives or the term of the lease, using
the straight-line method. Useful lives are as follows: buildings and
improvements – 7 to 50 years; leasehold improvements – the lesser of
the term of the lease or 7 years; equipment – 7 to 25 years; information
systems hardware and software – 3 to 10 years. Significant repairs
and maintenance that increase the value or extend the useful life of
our fixed asset are capitalized. On-going maintenance and repairs are
charged to expense.
Goodwill and Acquired Intangible Assets
Goodwill, defined as unidentified asset(s) acquired in conjunction
with a business acquisition, is tested for impairment on an annual
basis and between annual tests whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. Goodwill is tested at the reporting unit level, which is
defined as an operating segment or one level below the operating
segment. We can use a qualitative test, known as “Step 0,” or a
two-step quantitative method to determine whether impairment has
occurred. In Step 0, we elect to perform an optional qualitative analysis
and based on the results skip the two step analysis. In fiscal 2019, 2018
and 2017, we elected to implement Step 0 and were not required to
conduct the remaining two step analysis. Goodwill impairment testing
requires significant judgment and management estimates, including,
but not limited to, the determination of (i) the number of reporting
units, (ii) the goodwill and other assets and liabilities to be allocated
to the reporting units and (iii) the fair values of the reporting units. The
estimates and assumptions described above, along with other factors
such as discount rates, will significantly affect the outcome of the
impairment tests and the amounts of any resulting impairment losses.
The results of our Step 0 assessments indicated that it was more likely
than not that the fair value of our reporting unit exceeded its carrying
C V G W / / 46-47
value and therefore we concluded that there were no impairments for
the years ended October 31, 2019 and 2018.
Long-lived Assets
Long-lived assets, including fixed assets and intangible assets
(other than goodwill), are continually monitored and are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of any such asset may not be recoverable.
The determination of recoverability is based on an estimate of
undiscounted cash flows expected to result from the use of an asset
and its eventual disposition. The estimate of undiscounted cash flows
is based upon, among other things, certain assumptions about future
operating performance, growth rates and other factors. Estimates
of undiscounted cash flows may differ from actual cash flows due to,
among other things, technological changes, economic conditions,
changes to the business model or changes in operating performance. If
the sum of the undiscounted cash flows (excluding interest) is less than
the carrying value, an impairment loss will be recognized, measured
as the amount by which the carrying value exceeds the fair value of
the asset. For fiscal years 2019 and 2018, we performed our annual
assessment of long-lived assets and determined that no impairment
existed as of October 31, 2019 and 2018.
Investments
We account for non-marketable investments using the equity
method of accounting if the investment gives us the ability to exercise
significant influence over, but not control, an investee. Significant
influence generally exists when we have an ownership interest
representing between 20% and 50% of the voting stock of the investee.
Under the equity method of accounting, investments are stated at
initial cost and are adjusted for subsequent additional investments and
our proportionate share of earnings or losses and distributions.
In December 2014, Calavo formed a wholly owned subsidiary
Calavo Growers De Mexico, S. de R.L. de C.V. (Calavo Sub). In July
2015, Calavo Sub entered into a Shareholder Agreement with Grupo
Belo del Pacifico, S.A. de C.V., (Belo) a Mexican Company owned by
Agricola Belher, and Agricola Don Memo, S.A. de C.V. (Don Memo).
Don Memo, a Mexican corporation formed in July 2013, is engaged in
the business of owning and improving land in Jalisco, Mexico for the
growing of tomatoes and other produce and the sale and distribution
of tomatoes and other produce. Belo and Calavo Sub have an equal
one-half ownership interest in Don Memo. Pursuant to a management
service agreement, Belo, through its officers and employees, shall
have day-to-day power and authority to manage the operations. In
fiscal 2018, we contributed $ 0.1 million as investments in Don Memo.
This investment contribution represent Calavo Sub’s 50% ownership in
Don Memo, which is included in investment in unconsolidated entities
on our balance sheet. We use the equity method to account for this
investment. As of October 31, 2019 and 2018, we have an investment of
$4.9 million and $4.9 million in Don Memo.
As of October 31, 2019 and 2018, we have an investment of
$ 5.8 million and $19.9 million in FreshRealm, LLC (“FreshRealm”). We
record the amount of our investment in FreshRealm in “Investment
in unconsolidated entities” on our Consolidated Balance Sheets and
recognize losses in FreshRealm in “Income/(loss) in unconsolidated
entities” in our Consolidated Condensed Statement of Income. See
Note 16 for additional information.
Effective July 31, 2018, we entered into a Note and Membership
Unit Purchase Agreement (“NMUPA”) with FreshRealm, pursuant
to which we agreed to provide additional financing to FreshRealm,
subject to certain terms and conditions. Pursuant to such NMUPA, we
entered into a Subscription Agreement with FreshRealm, whereby we
purchased $ 3.5 million of equity units in FreshRealm, on July 31, 2018.
As of October 31, 2018, our ownership percentage in FreshRealm was
approximately 37%. In fiscal 2019, certain FreshRealm employees
left the company surrendering their ownership units. This changed
Calavo’s ownership percentage slightly to 38%.
In order to estimate the fair value of our investment in FreshRealm
we hired an independent third-party expert to provide their
written opinion on the fair value of our investment. We reviewed
and considered their independent expert opinion in making our
determination.
Marketable Securities
Our marketable securities consist of our investment in Limoneira
Company (Limoneira) stock. We currently own less than 10% of
Limoneira’s outstanding common stock. These securities are
considered available for sale securities based on management’s
intent with respect to such securities and are carried at fair value as
determined from quoted market prices.
On November 1, 2018 we adopted a new accounting standard,
which requires equity investments (except those accounted for under
the equity method of accounting) to be measured at fair value with
changes in fair value recognized in net income. With the adoption of
this new standard, we reclassed unrealized gains of $12.1 million in
accumulated other comprehensive income to retained earnings as of
November 1, 2018. Additionally, for the year ended October 31, 2019,
we sold 51,271 shares of Limoneira stock and recorded a loss of
$ 0.1 million in our consolidated statements of income. Limoneira’s
stock price at October 31, 2019, and October 31, 2018 equaled $18.92
per share, and $24.65 per share. Our remaining shares of Limoneira
stock, totaling 1,677,299, were revalued to $18.92 per share at
October 31, 2019 and, as a result, we recorded a loss of $ 9.6 million
for the year ended October 31, 2019 in our consolidated condensed
statements of income.
The estimated fair value, cost, and gross unrealized gain related to
such investment was $42.6 million, $23.5 million and $19.1 million as of
October 31, 2018.
Advances to Suppliers
We advance funds to third-party growers primarily in Mexico for
various farming needs. Typically, we obtain collateral (i.e. fruit, fixed
assets, etc.) that approximates the value at risk, prior to making such
advances. We continuously evaluate the ability of these growers to repay
advances in order to evaluate the possible need to record an allowance.
No such allowance was required at October 31, 2019 and 2018.
Pursuant to our distribution agreement, which was amended in
fiscal 2011, with Agricola Belher (Belher) of Mexico, a producer of
fresh vegetables, primarily tomatoes, for export to the U.S. market,
Belher agreed, at their sole cost and expense, to harvest, pack, export,
ship, and deliver tomatoes exclusively to our company, primarily our
Arizona facility. In exchange, we agreed to sell and distribute such
tomatoes, make advances to Belher for operating purposes, provide
additional advances as shipments are made during the season (subject
Notes To Consolidated Financial Statements
to limitations, as defined), and return the proceeds from such tomato
sales to Belher, net of our commission and aforementioned advances.
These advances will be collected through settlements by the end of
each year. For fiscal 2019 and 2018, we agreed to advance $4.5 million
and $4.09 million for preseason advances. As of October 31, 2019 and
2018, we have total advances of $4.5 million and $4.09 million to Belher
pursuant to this agreement, which is recorded in advances to suppliers.
Similar to Belher, we make advances to Don Memo for operating
purposes, provide additional advances as shipments are made during
the season, and return the proceeds from such tomato sales to Don
Memo, net of our commission and aforementioned advances. As of
October 31, 2019 and 2018, we have total advances of $ 3.7 million and
$2.5 million to Don Memo, which is recorded in advances to suppliers,
offset by tomato liabilities from the sales of tomatoes per the tomato
marketing agreement.
Infrastructure Advances
Pursuant to our infrastructure agreements, we make advances
to be used solely for the acquisition, construction, and installation
of improvements to and on certain land owned/controlled by Belher,
as well as packing line equipment. In August 2018, we entered into
an amended infrastructure agreement with Belher and advanced
$ 3.09 million. This amount shall be paid back in annual installments of
$ 0.6 million through June 2023, and incurs interest at Libor plus 10%.
Advances prior to this amended agreement incur interest at Libor plus
3.0%. As of October 31, 2019, we have advanced a total of $2.6 million
($ 0.8 million included in prepaid expenses and other current assets
and $1.8 million included in other long-term assets). As of October 31,
2018, we have advanced a total of $ 3.4 million ($ 0.8 million included in
prepaid expenses and other current assets and $2.6 million included in
other long-term assets). Belher may prepay, without penalty, all or any
portion of the advances at any time. In order to secure their obligations
pursuant to both agreements discussed above, Belher granted us
a first-priority security interest in certain assets, including cash,
inventory and fixed assets, as defined.
Accrued Expenses
Included in accrued expenses are liabilities related to the receipt of
goods and/or services for which an invoice has not yet been received.
These totaled approximately $18.7 million and $20.9 million for the year
ended October 31, 2019 and 2018.
Revenue Recognition
Effective at the beginning of our fiscal 2019, the Company adopted
Accounting Standards Update (ASU) No. 2014-09, “Revenue from
Contracts with Customers,” and all the related amendments (Accounting
Standards Codification (ASC) 606) using the modified retrospective
method of adoption. ASC 606 consists of a comprehensive revenue
recognition standard, which requires the recognition of revenue
when control of promised goods are transferred to customers in an
amount that reflects the consideration to which the entity expects
to be entitled.
The Company recognizes revenue when obligations under
the terms of a contract with its customer are satisfied; generally,
this occurs with the transfer of control of its products. Revenue is
measured as the amount of net consideration expected to be received
in exchange for transferring products. Revenue from product sales is
governed primarily by customer pricing and related purchase orders
(“contracts”) which specify shipping terms and certain aspects of
the transaction price including rebates, discounts and other sales
incentives. Contracts are at standalone pricing. The performance
obligation in these contracts is determined by each of the individual
purchase orders and the respective stated quantities, with revenue
being recognized at a point in time when obligations under the terms of
the agreement are satisfied. This generally occurs with the transfer of
control of our products to the customer and the product is delivered.
The Company’s customers have an implicit and explicit right to return
non-conforming products. A provision for payment discounts and
product return allowances, which is estimated, is recorded as a
reduction of sales in the same period that the revenue is recognized.
Sales Incentives and Other Promotional Programs
The Company routinely offers sales incentives and discounts
through various regional and national programs to our customers and
consumers. These programs include product discounts or allowances,
product rebates, product returns, one-time or ongoing trade-promotion
programs with customers and consumer coupon programs that require
the Company to estimate and accrue the expected costs of such
programs. The costs associated with these activities are accounted
for as reductions to the transaction price of the Company’s products
and are, therefore, recorded as reductions to gross sales at the time of
sale. The Company bases its estimates of incentive costs on historical
trend experience with similar programs, actual incentive terms per
customer contractual obligations and expected levels of performance
of trade promotions, utilizing customer and sales organization inputs.
The Company maintains liabilities at the end of each period for the
estimated incentive costs incurred but unpaid for these programs.
Differences between estimated and actual incentive costs are
generally not material and are recognized in earnings in the period such
differences are determined. Reserves for product returns, accrued
rebates and promotional accruals are included in the condensed
consolidated balance sheets as part of accrued expenses.
Principal vs. Agent Considerations
We frequently enter into consignment arrangements with
avocado and tomato growers and packers located outside of the U.S.
and growers of certain perishable products in the U.S. We evaluate
whether its performance obligation is a promise to transfer services
to the customer (as the principal) or to arrange for services to be
provided by another party (as the agent) using a control model. This
evaluation determined that the Company is in control of establishing
the transaction price, managing all aspects of the shipments process
and taking the risk of loss for delivery, collection, and returns. Based
on the Company’s evaluation of the control model, it determined that
all of the Company’s major businesses act as the principal rather than
the agent within their revenue arrangements and such revenues are
reported on a gross basis.
Practical Expedients
The Company elected the following practical expedients upon
its adoption of Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (ASC Topic 606).
C V G W / / 48-49
interest at the rate of 10% annually, with monthly interest payments
scheduled to begin on October 31, 2020. This first interest payment
would represent interest due for the month of October 2020 only, with
similar monthly payments scheduled to follow afterwards. The due
date of the notes is November 1, 2021, with the Company having the
option of up to two, one-year extensions (i.e. first to November 1, 2022,
then to November 1, 2023). At October 31, 2019, we have a receivable
of $2.4 million related to interest that we have recorded within Note
receivables to FreshRealm on the balance sheet. We assess the
collectability of these notes from FreshRealm based on their financial
results and, primarily, their cash projections. We have concluded no
reserve is necessary as of October 31, 2019. See Notes 8 and 16 in our
consolidated financial statements for further information.
Consignment Arrangements
We frequently enter into consignment arrangements with
avocado and tomato growers and packers located outside of the U.S.
and growers of certain perishable products in the U.S. Although we
generally do not take legal title to these avocados and perishable
products, we do assume responsibilities (principally assuming
credit risk, inventory loss and delivery risk, and pricing risk) that are
consistent with acting as a principal in the transaction. Accordingly,
the accompanying financial statements include sales and cost of sales
from the sale of avocados and perishable products procured under
consignment arrangements. Amounts recorded for each of the fiscal
years ended October 31, 2019, 2018 and 2017 in the financial statements
pursuant to consignment arrangements are as follows (in thousands):
Sales
Cost of Sales
Gross Profit
2019
2018
2017
$
$
64,510
$
43,490
$
25,891
57,061
38,186
22,784
7,449
$
5,304
$
3,107
Advertising Expense
Advertising costs are expensed when incurred and are generally
included as a component of selling, general and administrative
expense. Such costs were approximately $ 0.3 million, $ 0.2 million
and $ 0.1 million for fiscal years 2019, 2018, and 2017.
Research and Development
Research and development costs are expensed as incurred
and are generally included as a component of selling, general and
administrative expense. Total research and development costs for
fiscal years 2019, 2018 and 2017 were less than $ 0.1 million.
Other Income
Included in other income is dividend income totaling $ 0.6 million for
fiscal year 2019. Dividend income totaled $ 0.6 million and $ 0.5 million
for fiscal years 2018 and 2017. See Note 8 for related party disclosure
related to other income.
• Shipping and handling costs – The company elected to account
for shipping and handling activities that occur before the
customer has obtained control of a good as fulfillment activities
rather than as a promised service.
• Measurement of transaction price – The Company has elected
to exclude from the measurement of transaction price all taxes
assessed by a governmental authority that are both imposed on,
and concurrent with, a specific revenue-producing transaction
and collected by the Company from a customer for sales taxes.
• Contract costs – The Company has elected to recognize the
incremental costs of obtaining a contract as an expense when
incurred if the amortization period is one year or less.
The adoption of ASC 606 did not have an impact on our
consolidated results of operations for the year ended October 31, 2019.
Customers
We sell to retail grocery, foodservice, club stores, mass
merchandisers, food distributors and wholesale customers. Our top
ten customers accounted for approximately 59%, 59% and 59% of
our consolidated net sales in fiscal years 2019, 2018 and 2017. Sales
to our largest customer, Kroger (including its affiliates), represented
approximately 21%, 20%, and 19% of net sales in each of fiscal years
2019, 2018, and 2017. Additionally, Wal-Mart (including its affiliates)
represented approximately 13% and 10% of net sales in fiscal years
2019 and 2018. No other single customer accounted for more than 10%
of our net sales in any of the last three fiscal years.
Shipping and Handling
We include shipping and handling fees billed to customers in net
revenues. Amounts incurred by us for freight are included in cost of
goods sold.
Promotional Allowances
We provide for promotional allowances at the time of sale, based
on our historical experience. Our estimates are generally based on
evaluating the historical relationship between promotional allowances
and gross sales. The derived percentage is then applied to the current
period’s sales revenues in order to arrive at the appropriate debit
to sales allowances for the period. The offsetting credit is made
to accrued expenses. When certain amounts of specific customer
accounts are subsequently identified as promotional, they are written
off against this allowance. Actual amounts may differ from these
estimates and such differences are recognized as an adjustment to net
sales in the period they are identified.
Allowance for Accounts Receivable
We provide an allowance for estimated uncollectible accounts
receivable balances based on historical experience and the aging of
the related accounts receivable.
Notes receivable from FreshRealm
As of October 31, 2019, and October 31, 2018, we had notes
receivable (including interest) from FreshRealm totaling $ 35.2 million
and $ 9.09 million. At October 31, 2018, notes receivable from
FreshRealm of $ 9.09 million was included in prepaids and other
current assets. The notes to FreshRealm, as of October 31, 2019, bear
Notes To Consolidated Financial Statements
Income Taxes
We account for deferred tax liabilities and assets for the future
consequences of events that have been recognized in our consolidated
financial statements or tax returns. Measurement of the deferred items
is based on enacted tax laws. In the event the future consequences
of differences between financial reporting bases and tax bases of
our assets and liabilities result in a deferred tax asset, we perform an
evaluation of the probability of being able to realize the future benefits
indicated by such asset. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
We recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of
the position. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has
a greater than 50% likelihood of being realized upon ultimate settlement.
As a multinational corporation, we are subject to taxation in
many jurisdictions, and the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax laws and
regulations in various taxing jurisdictions. If we ultimately determine
that the payment of these liabilities will be unnecessary, the liability
will be reversed and we will recognize a tax benefit during the period
in which it is determined the liability no longer applies. Conversely, we
record additional tax charges in a period in which it is determined that
a recorded tax liability is less than the ultimate assessment is expected
to be.
The application of tax laws and regulations is subject to legal
and factual interpretation, judgment and uncertainty. Tax laws and
regulations themselves are subject to change as a result of changes
in fiscal policy, changes in legislation, the evolution of regulations and
court rulings. Therefore, the actual liability for U.S. or foreign taxes
may be materially different from management’s estimates, which
could result in the need to record additional tax liabilities or potentially
reverse previously recorded tax liabilities.
Basic and Diluted Net Income per Share
Basic earnings per share is calculated using the weighted-average
number of common shares outstanding during the period without
consideration of the dilutive effect of stock options and contingent
consideration. Diluted earnings per common share is calculated using
the weighted-average number of common shares outstanding during
the period after consideration of the dilutive effect of stock options and
the effect of contingent consideration shares.
Basic and diluted net income per share is calculated as follows (U.S. dollars in thousands, except per share data):
YEAR ENDED OCTOBER 31,
Numerator:
2019
2018
2017
Net Income attributable to Calavo Growers, Inc.
$
36,646
$
32,281
$
37,270
Denominator:
Weighted average shares – Basic
Effect on dilutive securities – Restricted stock/options
Weighted average shares - Diluted
Net income per share attributable to Calavo Growers, Inc:
Basic
Diluted
17,519
74
17,593
17,477
91
17,568
17,416
98
17,514
$
$
2.09
2.08
$
$
1.85
1.84
$
$
2.14
2.13
Stock-Based Compensation
Foreign Currency Translation and Remeasurement
We account for awards of equity instruments issued to employees
under the fair value method of accounting and recognize such amounts
in our statements of income. We measure compensation cost for all
stock-based awards at fair value on the date of grant and recognize
compensation expense in our consolidated statements of income over
the service period that the awards are expected to vest.
For the years ended October 31, 2019, 2018 and 2017, we recognized
compensation expense of $ 3.6 million, $4.6 million, and $4.3 million
related to stock-based compensation (See Note 12). The value of the
stock-based compensation was determined from quoted market prices
at the date of the grant.
Our foreign operations are subject to exchange rate fluctuations
and foreign currency transaction costs. The functional currency of our
foreign subsidiaries is the United States dollar. As a result, monetary
assets and liabilities are translated into U.S. dollars at exchange rates
as of the balance sheet date and non-monetary assets, liabilities
and equity are translated at historical rates. Sales and expenses are
translated using a weighted-average exchange rate for the period.
Gains and losses resulting from those remeasurements are included in
income. Gains and losses resulting from foreign currency transactions
are also recognized currently in income. Total foreign currency
translation losses for fiscal 2019, 2018 and 2017, net of gains, were
$ 0.3 million, $ 0.8 million, and $ 0.3 million.
C V G W / / 50-51
Fair Value of Financial Instruments
We believe that the carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable, and short-term borrowings
approximates fair value based on either their short-term nature or on
terms currently available to the Company in financial markets. Due to
current market rates, we believe that our fixed-rate long-term obligations
have nearly the same fair value and carrying value of approximately
$ 6.2 million and $ 0.4 million as of October 31, 2019 and 2018.
Deferred Rent
As part of certain lease agreements, we receive construction
allowances from our landlords. The construction allowances are
deferred and amortized on a straight-line basis over the life of the lease
as a reduction to rent expense.
Derivative Financial Instruments
We were not a party to any material derivative instruments
during the fiscal year. It is currently our intent not to use derivative
instruments for speculative or trading purposes. Additionally, we do
not use any hedging or forward contracts to offset market volatility.
Recently Issued Accounting Standards
In October 2018, the FASB issued ASU 2018-17, Targeted
Improvements to Related Party Guidance for Variable Interest Entities.
This ASU provides that indirect interests held through related parties in
common control arrangements should be considered on a proportional
basis for determining whether fees paid to decision makers and
service providers are variable interests. The new guidance is effective
for fiscal years beginning after December 15, 2019. This ASU will be
effective for us beginning the first day of our 2021 fiscal year. We are
evaluating the impact of the adoption of this ASU on our financial
condition, results of operations and cash flows, and, as such, we are
not able to estimate the effect the adoption of the new standard will
have on our financial statements.
In September 2018, the FASB issued and ASU, Intangibles-
Goodwill and Other-Internal-Use Software (Subtopic 350-40),
Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That is a Service Contract. This ASU requires
implementation costs incurred by customers in cloud computing
arrangements (i.e., hosting arrangements) to be capitalized under the
same premises of authoritative guidance for internal-use software
and deferred over the non-cancellable term of the cloud computing
arrangements plus any option renewal periods that are reasonably
certain to be exercised by the customer or for which the exercise is
controlled by the service provider. This ASU will be effective for us
beginning the first day of our 2021 fiscal year. We are evaluating the
impact of the adoption of this ASU on our financial condition, results
of operations and cash flows, and, as such, we are not able to
estimate the effect the adoption of the new standard will have on
our financial statements.
In June 2018, the FASB issued an ASU, Improvements to
Nonemployee Share-Based Payment Accounting. The FASB is issuing
this update to simplify the accounting for share-based payments to
nonemployees by aligning it with the accounting for share-based
payments to employees, with certain exceptions. This ASU will be
effective for us beginning the first day of our 2020 fiscal year. We do
not expect that the adoption of this ASU to have an impact on our
financial statements.
In February 2018, the FASB issued an ASU, Reclassification of
Certain Tax Effects From Accumulated Other Comprehensive Income,
which amends Accounting Standards Codification (“ASC”) 220,
Income Statement — Reporting Comprehensive Income, to allow a
reclassification from accumulated other comprehensive income to
retained earnings for stranded tax effects resulting from the Tax Cuts
and Jobs Act, (the “Act”). In addition, under the ASU, an entity will be
required to provide certain disclosures regarding stranded tax effects.
This ASU is effective for us the first day of our 2020 fiscal year. We
do not expect that the adoption of this ASU to have an impact on our
financial statements.
In January 2017, the FASB issued an ASU, Simplifying the Test for
Goodwill Impairment, which removes the requirement to compare the
implied fair value of goodwill with its carrying amount as part of step 2
of the goodwill impairment test. The ASU permits an entity to perform
its annual, or interim, goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount and to recognize
an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that
reporting unit. This ASU will be effective for us beginning the first day
of our 2021 fiscal year and is not expected to have a significant impact
upon adoption.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments
– Measurement of Credit Losses on Financial Instruments, and
subsequent amendments to the guidance, ASU 2018-19 in November
2018 and ASU 2019-05 in May 2019 including codification improvements
to Topic 326 in ASU 2019-04. The standard significantly changes
how entities will measure credit losses for most financial assets and
certain other instruments that aren’t measured at fair value through
net income. The standard will replace today’s “incurred loss” approach
with an “expected loss” model for instruments measured at amortized
cost. For available-for-sale debt securities, entities will be required
to record allowances rather than reduce the carrying amount, as they
do today under the other-than-temporary impairment model. It also
simplifies the accounting model for purchased credit-impaired debt
securities and loans. The amendment will affect loans, debt securities,
trade receivables, net investments in leases, off balance sheet
credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right
to receive cash. ASU 2018-19 clarifies that receivables arising from
operating leases are accounted for using lease guidance and not as
financial instruments. ASU 2019-05 provides entities that have certain
instruments with an option to irrevocably elect the fair value option.
The amendments should be applied on either a prospective transition
or modified-retrospective approach depending on the subtopic. This
ASU will be effective for us beginning the first day of our 2021 fiscal
year. Early adoption is permitted. We are evaluating the impact of the
adoption of this ASU on our financial condition, results of operations
and cash flows, and, as such, we are not able to estimate the effect the
adoption of the new standard will have on our financial statements.
In February 2016, the FASB issued an ASU, Leases, which requires
a dual approach for lessee accounting under which a lessee would
account for leases as finance leases or operating leases. Both finance
leases and operating leases will result in the lessee recognizing
Notes To Consolidated Financial Statements
a right-of use asset (ROU) and a corresponding lease liability. For
finance leases, the lessee would recognize interest expense and
amortization of the right-of-use asset, and for operating leases,
the lessee would recognize a straight-line total lease expense. The
guidance also requires qualitative and specific quantitative disclosures
to supplement the amounts recorded in the financial statements so
that users can understand more about the nature of an entity’s leasing
activities, including significant judgments and changes in judgments.
This ASU will be effective for us beginning the first day of our 2020
fiscal year.
The new standard provides a number of optional practical
expedients in transition. We expect to elect the ‘package of practical
expedients’, which permits us not to reassess under the new standard
our prior conclusions about lease identification, lease classification
and initial direct costs. We do not expect to elect the use-of-hindsight
or the practical expedient pertaining to land easements; the latter not
being applicable to us. We expect to elect all of the new standard’s
available transition practical expedients.
We will elect the alternative modified retrospective approach,
applying ASC 840 to all comparative periods, including disclosures,
and recognize the effects of applying ASC 842 as a cumulative-
effect adjustment to retained earnings as of the effective date. Upon
adoption, the most significant effects are expected to relate to (1) the
recognition of new ROU assets and lease liabilities on our balance
sheet for our operating leases, which is expected to be between
$ 60 million and $70 million at the beginning of fiscal 2020; and (2)
providing significant new disclosures about our leasing activities.
Comprehensive Income
Comprehensive income is defined as all changes in a company’s net
assets, except changes resulting from transactions with shareholders.
For the fiscal year ended October 31, 2018, other comprehensive income
includes the unrealized gain on our Limoneira investment totaling
$1.7 million, net of income taxes. Limoneira’s stock price at October
31, 2018 equaled $24.65 per share. For the fiscal year ended October
31, 2017, other comprehensive income includes the unrealized gain on
our Limoneira investment totaling $ 3.9 million, net of income taxes.
Limoneira’s stock price at October 31, 2017 equaled $23.35 per share.
In January 2016, the FASB issued an ASU, which requires equity
investments (except those accounted for under the equity method of
accounting) to be measured at fair value with changes in fair value
recognized in net income. The Company adopted this new standard at
the beginning of fiscal 2019. Limoneira’s stock price at October 31, 2019,
and October 31, 2018 equaled $18.92 per share, and $24.65 per share.
Our shares of Limoneira stock, totaling 1,677,299, were revalued to
$18.92 per share at October 31, 2019 and, as a result, we recorded
a loss of $ 9.6 million for the year ended October 31, 2019 in our
consolidated condensed statements of income.
Noncontrolling Interest
The following tables reconcile shareholders’ equity attributable to
noncontrolling interest related to Avocados de Jalisco (in thousands).
AVOCADOS DE JALISCO
NONCONTROLLING INTEREST
YEAR ENDED
OCTOBER 31, 2019
YEAR ENDED
OCTOBER 31, 2018
Noncontrolling interest,
beginning
Noncash transfer of
noncontrolling interest
Net loss attributable to
noncontrolling interest
of Avocados de Jalisco
Noncontrolling interest,
ending
$
1,748
$
1,016
—
(60)
1,001
(269)
$
1,688
$
1,748
3.
INVENTORIES
Inventories consist of the following (in thousands):
OCTOBER 31,
Fresh fruit
2019
2018
$
15,874
$
12,902
Packing supplies and ingredients
Finished prepared foods
11,370
9,645
10,889
11,253
$
36,889
$
35,044
We assess the recoverability of inventories through an ongoing
review of inventory levels in relation to sales and forecasts and
product marketing plans. When the inventory on hand, at the time of
the review, exceeds the foreseeable demand, the value of inventory
that is not expected to be sold is written down. The amount of the
write-down is the excess of historical cost over estimated realizable
value. Once established, these write-downs are considered permanent
adjustments to the cost basis of the excess inventory.
The assessment of the recoverability of inventories and the
amounts of any write-downs are based on currently available
information and assumptions about future demand and market
conditions. Demand for processed avocado products may fluctuate
significantly over time, and actual demand and market conditions
may be more or less favorable than our projections. In the event that
actual demand is lower than originally projected, additional inventory
write-downs may be required. No adjustment was necessary as of
October 31, 2019 and 2018.
C V G W / / 52-53
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following
(in thousands):
OCTOBER 31,
Land
Buildings and improvements
Leasehold improvements
Equipment
Information systems –
hardware and software
Construction in progress
2019
2018
$
11,008
$
11,569
45,614
26,267
99,237
10,822
10,351
203,299
44,828
26,004
89,451
10,752
5,867
188,471
Less accumulated depreciation
and amortization
(71,201)
(66,328)
$
132,098
$ 122,143
The intangible assets consist of the following (in thousands):
Depreciation expense was $13.09 million, $11.9 million and
$ 9.5 million for fiscal years 2019, 2018, and 2017, of which $ 0.4 million,
$ 0.3 million and $ 0.5 million was related to depreciation on capital
leases for fiscal year 2019, 2018, and 2017.
Property, plant, and equipment include various capital leases
which total $7.5 million and $ 3.4 million, less accumulated depreciation
of $1.1 million and $ 3.3 million as of October 31, 2019 and 2018.
5. OTHER ASSETS
Other assets consist of the following (in thousands):
OCTOBER 31,
2019
2018
Mexican IVA (i.e. value-added)
taxes receivable (see note 15)
$
27,592
$
21,859
Infrastructure advance
to Agricola Belher
Intangibles, net
Other
1,800
435
1,514
2,600
1,109
1,462
$
31,341
$
27,030
OCTOBER 31, 2019
OCTOBER 31, 2018
WEIGHTED-
AVERAGE
USEFUL LIFE
GROSS
CARRYING
VALUE
ACCUMULATED
AMORTIZATION
NET BOOK
VALUE
GROSS
CARRYING
VALUE
ACCUMULATED
AMORTIZATION
NET BOOK
VALUE
Customer list/relationships
Trade names
Trade secrets/recipes
Brand name intangibles
Intangibles, net
—
—
9.3 years
indefinite
$
7,640
$
(7,640)
$
2,760
630
275
(2,760)
(470)
—
$
11,305
$
(10,870)
$
—
—
160
275
435
$
7,640
$
(7,106)
$
2,760
630
275
(2,672)
(418)
—
534
88
212
275
$
11,305
$
(10,196)
$
1,109
We recorded amortization expense of approximately $ 0.7 million,
$1.1 million, and $1.2 million for fiscal years 2019, 2018, and 2017.
We anticipate recording amortization expense of approximately
$ 0.1 million for each fiscal years 2020 through 2023.
6. REVOLVING CREDIT FACILITIES
In June 2016, we entered into a new Credit Agreement with Bank
of America, N.A. (Bank of America) as administrative agent and
Merrill Lynch, Pierce, Fenner & Smith Inc. as joint lead arranger and
sole bookrunner, and Farm Credit West (FCW), as joint lead arranger.
The Credit Agreement provides for a five-year, $ 80 million syndicated
senior unsecured revolving credit facility maturing on June 14, 2021
(the Credit Facility). For our line of credit the weighted-average
interest rate was 3.8% and 3.4% at October 31, 2019 and 2018. Under
this credit facility, there was nothing outstanding as of October 31, 2019
and we had $15.09 million outstanding as of October 31, 2018.
Provided there exists no default, upon notice to Bank of America,
the Company may from time to time, request an increase in the Credit
Facility by an amount not exceeding $ 50 million (the Accordion).
Any future exercises of the Accordion would require additional
commitments from existing or new lenders.
Borrowings under the Credit Facility will be at the Company’s
discretion either at a Eurodollar Rate (LIBOR) loan plus applicable
margin or a base rate loan plus applicable margin. The applicable
margin will be based on the Company’s Consolidated Leverage Ratio
and can range from 1.00% to 1.50% for LIBOR loans and 0.00% to 0.50%
for Base Rate Loans. The Credit Facility also includes a commitment
fee on the unused commitment amount at a rate per annum of 0.15%.
The Credit Facility contains customary affirmative and negative
covenants for agreements of this type, including the following financial
covenants applicable to the Company and its subsidiaries on a
consolidated basis: (a) a quarterly consolidated leverage ratio of not
more than 2.50 to 1.00 and (b) a quarterly consolidated fixed charge
coverage ratio of not less than 1.15 to 1.00. We were in compliance with
all such covenants at October 31, 2019 and 2018.
The Credit Facility also contains customary events of default. If any
event of default occurs and is continuing, Bank of America may take the
Notes To Consolidated Financial Statements
following actions: (a) declare the commitment of each lender to make
loans and any obligation of the Issuer to make credit extensions to be
terminated; (b) declare the unpaid principal amount of all outstanding
loans, all interest, and all other amounts to be immediately due and
payable; (c) require that Calavo cash collateralize the obligations; and
(d) exercise on behalf of itself, the lenders and the Issuer all rights and
remedies available to it.
7. COMMITMENTS AND CONTINGENCIES
Commitments and guarantees
We lease facilities and certain equipment under non-cancelable
leases expiring at various dates through 2031. We are committed
to make minimum cash payments under these agreements as of
October 31, 2019, as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
$
9,534
9,007
8,672
8,603
8,203
50,796
$
94,815
Total rent expense amounted to approximately $10.7 million,
$ 6.4 million and $ 6.09 million for the years ended October 31, 2019,
2018, and 2017 Rent to Limoneira, for our corporate office, amounted to
approximately $ 0.3 million for fiscal years 2019, 2018, and 2017.
In April 2019, we sold our Temecula, California packinghouse
for $7.1 million in cash and, concurrently, leased back a portion of
the facility representing approximately one-third of the total square
footage. In connection with the capital lease we capitalized $ 3.2 million
as a capital lease in property, plant and equipment and recorded
a lease liability of $ 3.2 million ($ 0.1 million in current portion and
$ 3.1 million in long term debt).
During our third quarter of fiscal year 2019, we entered into a
10-year building and equipment lease for fresh food facility in Conley,
GA. This facility is primarily intended to process fresh-cut fruit
& vegetables and prepared foods products for our RFG business
segment. Annual rent for the building and equipment approximates
$ 0.9 million and $ 0.6 million, respectively, over the life of the lease. The
lease for the equipment is considered to be a capital lease, therefore,
we calculated the present value of the minimum lease payments
related to the equipment and capitalized $2.8 million as a capital lease
in property, plant and equipment and recorded $2.8 million as a lease
obligation.
We indemnify our directors and have the power to indemnify each
of our officers, employees and other agents, to the maximum extent
permitted by applicable law. No amounts have been accrued in the
accompanying financial statements related to these indemnifications.
Litigation
From time to time, we are also involved in other litigation arising in
the ordinary course of our business that we do not believe will have a
material adverse impact on our financial statements.
Mexico tax audits
We conduct business both domestically and internationally and,
as a result, one or more of our subsidiaries files income tax returns in
U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in
the normal course of business, we are subject to examination by taxing
authorities, primarily in Mexico and the United States. During our third
quarter of fiscal 2016, our wholly owned subsidiary, Calavo de Mexico
(CDM), received a written communication from the Ministry of Finance
and Administration of the government of the State of Michoacan,
Mexico (MFM) containing preliminary observations related to a 2011
tax audit of such subsidiary. MFM’s preliminary observations outline
certain proposed adjustments primarily related to intercompany
funding, deductions for services from certain vendors/suppliers
and Value Added Tax (IVA). During the period from our fourth fiscal
quarter of 2016 through our first fiscal quarter of 2019, we attempted
to resolve our case with the MFM through working meetings attended
by representatives of the MFM, CDM and PRODECON (Local Tax
Ombudsman). However, we were unable to materially resolve our case
with the MFM through the PRODECON process.
As a result, in April 2019, the MFM issued a final tax assessment
to CDM (“the 2011 Assessment”) totaling approximately $2.2 billion
Mexican pesos (approx. $114.4 million USD at October 31, 2019)
related to Income Tax, Flat Rate Business Tax and Value Added Tax,
corresponding to the fiscal 2011 tax audit. We have consulted with an
internationally recognized tax advisor and continue to believe this tax
assessment is without merit. Therefore, we filed an administrative
appeal challenging the MFM’s fiscal 2011 assessment on June 12,
2019. The filing of an administrative appeal in Mexico is a process in
which the taxpayer appeals to a different office within the Mexican
tax authorities, forcing the legal office within the MFM to rule on the
matter. This process preserves the taxpayer’s right to litigate in tax
court if the administrative appeal process ends without a favorable or
just resolution. Furthermore, in August 2018, we received a favorable
ruling from Mexico’s Federal Tax Administration Service, Servicio de
Administracion Tributaria’s (the “SAT”) central legal department in
Mexico City on another tax matter (see Note 15 regarding IVA refunds)
indicating that they believe that our legal interpretation is accurate on
a matter that is also central to the 2011 Assessment. We believe this
recent ruling undermines the Assessment we received in April 2019.
We believe we have the legal arguments and documentation to sustain
the positions challenged by the MFM.
Additionally, we also received notice from the SAT, that CDM is
currently under examination related to fiscal year 2013. In January
2017, we received preliminary observations from SAT outlining certain
proposed adjustments primarily related to intercompany funding,
deductions for services from certain vendors/suppliers, and VAT. We
provided a written rebuttal to these preliminary observations during
our second fiscal quarter of 2017. During the period from our third fiscal
quarter of 2017 through our third fiscal quarter of 2018, we attempted
to resolve our case with the SAT through working meetings attended
by representatives of the SAT, CDM and the PRODECON. However, we
were unable to materially resolve our case with the SAT through the
PRODECON process.
C V G W / / 54-55
As a result, in July 2018, the SAT’s local office in Uruapan issued
to CDM a final tax assessment (the “2013 Assessment”) totaling
approximately $2.6 billion Mexican pesos (approx. $135.1 million
USD at October 31, 2019) related to Income Tax, Flat Rate Business
Tax, and Value Added Tax, corresponding to the fiscal 2013 tax audit.
Additionally, the tax authorities have determined that we owe an
employee’s profit-sharing liability, totaling approximately $118 million
Mexican pesos (approx. $ 6.1 million USD at October 31, 2019).
We have consulted with both an internationally recognized tax
advisor, as well as a global law firm with offices throughout Mexico,
and we continue to believe that this tax assessment is without
merit. In August 2018, we filed an administrative appeal on the 2013
Assessment. CDM has appealed our case to the SAT’s central legal
department in Mexico City. Furthermore, and as noted in the preceding
paragraphs, in August 2018, we received a favorable ruling from the
SAT’s central legal department in Mexico City on another tax matter
(see Note 15 regarding IVA refunds) indicating that they believe that
our legal interpretation is accurate on a matter that is also central
to the 2013 Assessment. We believe this recent ruling significantly
undermines the 2013 Assessment we received in July 2018. We
believe we have the legal arguments and documentation to sustain the
positions challenged by the SAT.
We continue to believe that the ultimate resolution of these matters
is unlikely to have a material effect on our consolidated financial
position, results of operations and cash flows. No amounts have been
accrued in the accompanying financial statements related to these
Mexico tax audits.
8. RELATED-PARTY TRANSACTIONS
Certain members of our Board of Directors market California
avocados through Calavo pursuant to marketing agreements
substantially similar to the marketing agreements that we enter into
with other growers. During the years ended October 31, 2019, 2018, and
2017, the aggregate amount of avocados procured from entities owned
or controlled by members of our Board of Directors was $11.9 million,
$11.2 million and $19.8 million. We did not have any amounts due to
Board members as of October 31, 2019 and 2018.
During fiscal years 2019, 2018, and 2017, we received $ 0.5 million,
$ 0.4 million and $ 0.4 million as dividend income from Limoneira. In
addition, we lease office space from Limoneira for our corporate
office. Rent to Limoneira amounted to approximately $ 0.3 million for
fiscal years 2019, 2018, and 2017. Harold Edwards, who is a member
of our Board of Directors, is the Chief Executive Officer of Limoneira
Company. We have less than 10% ownership interest in Limoneira.
Additionally, our Chief Executive Officer was a member of the
Limoneira Board of Directors. In December 2018, our Chief Executive
Officer retired from Limoneira’s Board of Directors.
We currently have a member of our Board of Directors who
also serves as a partner in the law firm of TroyGould PC, which
frequently represents Calavo as legal counsel. During the years
ended October 31, 2019, 2018, and 2017, Calavo Growers, Inc. paid fees
totaling approximately $ 0.4 million, $ 0.2 million and $ 0.2 million to
TroyGould PC.
In December 2014, Calavo formed a wholly owned subsidiary
Calavo Growers De Mexico, S. de R.L. de C.V. (Calavo Sub). In July
2015, Calavo Sub entered into a Shareholder Agreement with Grupo
Belo del Pacifico, S.A. de C.V., (Belo) a Mexican Company owned by
Agricola Belher, and formed Agricola Don Memo, S.A. de C.V. Belo and
Calavo Sub have an equal one-half ownership interest in Don Memo
in exchange for $2 million each. Pursuant to a management service
agreement, Belo, through its officers and employees, has day-to-day
power and authority to manage the operations. Belo is entitled to a
management fee, as defined, which is payable annually in July of each
year. Additionally, Calavo Sub is entitled to commission, for the sale of
produce in the Mexican National Market, U.S., Canada, and any other
overseas market.
In January 2016, our unconsolidated subsidiary, Don Memo,
entered into a loan agreement in the amount of $4.5 million with Bank
of America, N.A. (BoA) proceeds of which were used by Don Memo
to repay debt owed to Calavo. Also in January 2016, Calavo and BoA,
entered into a Continuing and Unconditional Guaranty Agreement (the
Guaranty). Under the terms of the Guaranty, Calavo unconditionally
guarantees and promises to pay Bank of America any and all
Indebtedness, as defined therein, of our unconsolidated subsidiary Don
Memo to BoA. Belo has also entered into a similar guarantee with BoA.
In December 2018, Don Memo received third party financing, repaid its
loan to Bank of America and therefore, Calavo is no longer a guarantor
for Don Memo’s indebtedness.
As of October 31, 2019, 2018 and 2017, we have an investment of
$4.9 million, $4.9 million and $4.6 million, representing Calavo Sub’s
50% ownership in Don Memo, which is included as an investment in
unconsolidated entities on our balance sheet. We make advances to
Don Memo for operating purposes, provide additional advances as
shipments are made during the season, and return the proceeds from
tomato sales under our marketing program to Don Memo, net of our
commission and aforementioned advances. In September 2018, we
contributed $ 0.2 million, of which $ 0.1 million was a short-term loan,
and $ 0.1 million was an additional investment. As of October 31, 2019,
2018 and 2017, we had outstanding advances of $ 3.7 million, $2.5 million
and $1.6 million to Don Memo. During the year ended October 31, 2019,
2018 and 2017 we purchased $14.1 million, $11.1 million and $ 8.9 million
of tomatoes from Don Memo pursuant to our consignment agreement.
We had grower advances due from Belher of $4.5 million,
$4.09 million and $4.09 million as of October 31, 2019, 2018 and 2017. In
August 2018, we entered into an amended infrastructure agreement
with Belher and advanced $ 3.09 million. This amount shall be paid
back annually at $ 0.6 million through June 2023, and incur interest of
Libor plus 10%. We had infrastructure advances due from Belher of
$2.6 million, $ 3.4 million and $ 0.6 million as of October 31, 2019, 2018
and 2017. Of these infrastructure advances $ 0.8 million was recorded
as receivable in prepaid and other current assets and $1.8 million is
included in other assets. During the year ended October 31, 2019, 2018
and 2017, we purchased $19.5 million, $14.1 million, and $13.9 million of
tomatoes from Belher pursuant to our consignment agreement.
In August 2015, we entered into Shareholder’s Agreement with
various partners which created Avocados de Jalisco, S.A.P.I. de C.V.
Avocados de Jalisco is a Mexican corporation created to engage in
procuring, packing and selling avocados. This entity is approximately
83% owned by Calavo and is consolidated in our financial statements.
Avocados de Jalisco built a packinghouse located in Jalisco, Mexico
and such packinghouse began operations in June of 2017. As of
October 31, 2019, we have made an insignificant amount of preseason
advances to various partners of Avocados de Jalisco. As of October 31,
Notes To Consolidated Financial Statements
2018 and 2017, we have made preseason advances of approximately
$ 0.1 million to various partners of Avocados de Jalisco. During the year
ended October 31, 2019, 2018 and 2017, we purchased approximately
$2.5 million, $1.8 million and $1.9 million of avocados from the partners
of Avocados de Jalisco. In January 2018, we transferred $1.09 million of
interest to the Avocados de Jalisco noncontrolling members.
As of October 31, 2019 and 2018, we have an equity investment of
$ 5.8 million and $19.9 million in FreshRealm, LLC (“FreshRealm”). We
record the amount of our investment in FreshRealm in “Investment
in unconsolidated entities” on our Consolidated Condensed Balance
Sheets and recognize losses in FreshRealm in “Income/(loss) in
unconsolidated entities” in our Consolidated Condensed Statement
of Income. See Note 16 for additional information. As of October 31,
2018, our ownership percentage in FreshRealm was approximately
37%. In fiscal 2019, certain FreshRealm employees left the company
surrendering their ownership units, as a result, this increased our
ownership percentage in FreshRealm slightly to approximately 38%.
Effective July 31, 2018, we entered into a Note and Membership
Unit Purchase Agreement (“NMUPA”) with FreshRealm, pursuant
to which we agreed to provide additional financing to FreshRealm,
subject to certain terms and conditions. Pursuant to the NMUPA, we
entered into a $12 million Senior Promissory Note and corresponding
Security Agreement with FreshRealm, effective August 10, 2018. We
funded $ 9 million of this loan commitment during the fourth quarter
of fiscal 2018 and funded the remaining loan commitment amount of
$ 3 million during the first quarter of fiscal 2019. During the second
quarter of fiscal 2019, we amended the note related to this loan,
due October 31, 2019, and, among other things, included a provision
whereby we had the option to extend repayment of this note to
November 1, 2020.
During our first quarter of fiscal 2019, we loaned FreshRealm
$7.5 million in unsecured notes receivable. During our second quarter
of fiscal 2019, we loaned an additional $4.2 million on an unsecured
basis to FreshRealm under similar terms. During our third quarter of
fiscal 2019, we loaned an additional $ 5.4 million on an unsecured basis
to FreshRealm under similar terms. During our fourth quarter of fiscal
2019, we loaned an additional $ 3.7 million to FreshRealm for a total
outstanding principal amount of $ 32.8 million, not including accrued
interest. At such time, we entered into an agreement with FreshRealm
wherein all of the outstanding loan amount owed by Fresh Realm to us
would be secured in the assets of FreshRealm.
As of October 31, 2019, we have $ 35.2 million in note receivables
(including interest) from FreshRealm, and as of October 31, 2018,
we had $ 9.09 million. At October 31, 2018, note receivables from
FreshRealm of $ 9.09 million was included in prepaids and other
current assets. The notes to FreshRealm, as of October 31, 2019, bear
interest at the rate of 10% annually, with monthly interest payments
scheduled to begin on October 31, 2020. This first interest payment
would represent interest due for the month of October 2020 only, with
similar monthly payments scheduled to follow afterwards. The due
date of the notes is November 1, 2021, with the Company having the
option of up to two, one-year extensions (i.e. first to November 1, 2022,
then to November 1, 2023). At October 31, 2019 we have a receivable
of $2.4 million related to interest that we have recorded with Note
receivables to FreshRealm on the balance sheet.
As of November 25, 2019, we converted approximately $2.7 million
of the outstanding secured loan to FreshRealm and applied it to
unsecured debt as part of a convertible note round offered by
FreshRealm to its existing equity holders. Such $2.7 million unsecured
note will be converted into additional equity of FreshRealm if not repaid
by January 31, 2020. Such convertible note accrues interest at the rate
of 10%.
Three officers and five members of our board of directors have
investments in FreshRealm. In addition, as of October 31, 2019 and 2018,
we have a loan to FreshRealm members of approximately $ 0.2 million.
In October 2017 and December 2017, our Chairman and Chief Executive
Officer invested $7.09 million and $1.5 million, respectively, into
FreshRealm. In January 2018, one of our non-executive directors
invested $1.8 million into FreshRealm. In the second quarter of fiscal
2018, two of our non-executive directors invested $1.2 million into
FreshRealm. In October 2019, our Chairman and Chief Executive
Officer invested $ 0.5 million in FreshRealm. In October 2019, one of our
non-executive directors invested $ 0.2 million into FreshRealm.
We provide storage services to FreshRealm from select Value-
Added Depots and RFG facilities. We received $ 0.5 million, $ 0.3 million
and $ 0.2 million in storage services revenue from FreshRealm for
the year ended October 31, 2019, 2018 and 2017. For the year ended
October 31, 2019, 2018 and 2017, RFG sold $2.09 million, $ 9.9 million and
$7.3 million of products to FreshRealm.
The previous owners of RFG, one of which is currently an officer
of Calavo, have a majority ownership of certain entities that provide
various services to RFG, specifically LIG Partners, LLC and THNC,
LLC. One of RFG’s California operating entities leases a building from
LIG Partners, LLC (LIG) pursuant to an operating lease. This lease
with LIG was renewed in April 2019, through May 2026. RFG’s Texas
operating entity leases a building from THNC, LLC (THNC) pursuant to
an operating lease. In the first quarter of fiscal 2020, these facilities
have been sold to a third party and our lease has transferred to the new
owners. See the following tables for the related party activity for fiscal
years 2019 and 2018:
YEAR ENDED OCTOBER 31,
(in thousands)
Rent paid to LIG
Rent paid to THNC, LLC
2019
579
795
$
$
2018
603
819
$
$
9.
INCOME TAXES
On December 22, 2017, the President of the United States signed
and enacted comprehensive tax legislation into law H.R. 1, commonly
referred to as the Tax Cuts and Jobs Act (the “Tax Act”). In the prior
fiscal period, the Company considered a number of changes from the
Tax Act, most notably reducing the U.S. federal corporate tax rate,
a one-time transition tax on earnings of certain foreign subsidiaries
that were previously tax deferred, and accelerated depreciation for
certain assets acquired and placed in service after September 27,
2017. Effective January 1, 2018, the Tax Act reduced the U.S. federal
corporate tax rate from 35.0% to 21.0%. Because the Company has an
October 31 fiscal year-end, the lower corporate federal income tax rate
was phased in, resulting in a blended U.S. federal statutory tax rate of
23.3% for our fiscal period 2018, and 21% for the fiscal period 2019.
Effective beginning in fiscal period 2019, the Company is subject
to additional requirements of the Tax Act including the repeal of
the deduction for domestic production activities, a tax on global
intangible low-taxed income (GILTI), a tax determined by base
erosion tax benefits (BEAT) from certain payments between a U.S.
corporation and foreign subsidiaries, a limitation of certain executive
compensation, a deduction for foreign derived intangible income (FDII)
and interest expense limitations. The Company has considered these
new requirements, the most significant of which being the limitation of
executive compensation of $ 0.2 million and the repeal of the domestic
production deduction. The domestic production deduction generated a
tax benefit of $ 0.8 million in fiscal period 2018.
The Tax Act created new rules that allow the Company to make
an accounting policy election to either treat taxes due on future
GILTI inclusions in taxable income as either a current period expense
or reflect such inclusions related to temporary basis differences in
the Company’s measurement of deferred taxes. The Company is not
expecting to be subject to GILTI and therefore has not yet made a policy
election regarding the tax accounting treatment of the GILTI tax. The
Company also continues to evaluate the impact of the GILTI provisions
under the U.S. tax law changes which are complex and subject to
continuing regulatory interpretation by the IRS. The impact of GILTI
was not material for the fiscal period 2019.
On December 22, 2017, the SEC issued guidance under Staff
Accounting Bulletin No. 118, Income Tax Accounting Implications of
the Tax Cuts and Jobs Act (“SAB 118”) allowing taxpayers to record
a reasonable estimate of the impact of the U.S. legislation when
it does not have the necessary information available, prepared or
analyzed (including computations) in reasonable detail to complete
its accounting for the change in tax law. As of fiscal period 2019, the
company has completed its accounting for the act.
Prior to the enactment of the Tax Act, the Company regularly
determined certain foreign earnings to be indefinitely reinvested
outside the United States. Our intent is to permanently reinvest
these funds outside of the United States and our current plans do not
demonstrate a need to repatriate the cash to fund our U.S. operations.
However, if these funds were repatriated, we would be required to
accrue and pay applicable United States taxes (if any) and withholding
taxes payable to foreign tax authorities.
The income tax provision consists of the following for the years
ended October 31, (in thousands):
CURRENT:
Federal
State
Foreign
Total current
DEFERRED:
Federal
State
Foreign
Total deferred
$
9,146
$
7,115
$
14,875
2,516
290
11,952
516
209
205
930
1,582
(844)
7,853
3,328
690
848
4,866
2,561
290
17,726
2,567
335
(178)
2,724
Total income tax provision
$
12,882
$
12,719
$
20,450
C V G W / / 56-57
At October 31, 2019 and 2018, gross deferred tax assets totaled
approximately $18.5 million and $19.1 million, while gross deferred
tax liabilities totaled approximately $15.0. million and $14.8 million.
Deferred income taxes reflect the net of temporary differences
between the carrying amount of assets and liabilities for financial
reporting and income tax purposes.
Significant components of our deferred taxes assets (liabilities) as
of October 31, are as follows (in thousands):
2019
2018
Property, plant, and equipment
$
(10,407)
$
(7,715)
Intangible assets
Unrealized gain, Limoneira investment
Investment in FreshRealm
Stock-based compensation
State taxes
Credits and incentives
Allowance for accounts receivable
Inventories
Accrued liabilities
Other
11,805
(2,352)
(1,513)
857
(437)
1,109
834
445
3,423
(317)
13,886
(4,777)
(1,283)
899
(690)
1,641
825
353
1,533
(295)
Long-term deferred income taxes
$
3,447
$
4,377
A reconciliation of the significant differences between the federal
statutory income tax rate and the effective income tax rate on pretax
income for the years ended October 31, is as follows:
Federal statutory tax rate
21.0%
23.3%
35.0%
2019
2018
2017
State taxes, net of
federal effects
Foreign income taxes
greater than U.S.
Section 199 deduction
Provision to return
Transition Tax
State rate change
Other
3.7
0.4
—
—
0.7
—
(0.2)
0.4
26.0%
3.6
0.7
4.5
(1.9)
(1.2)
0.6
0.2
2.9
0.1
—
(2.2)
—
—
0.3
(1.4)
28.4%
(0.7)
35.4%
For fiscal years 2019, 2018 and 2017, income before income taxes
related to domestic operations was approximately $47.9 million,
$45.8 million, and $ 57.5. million. For fiscal years 2019, 2018 and 2017,
income (loss) before income taxes related to foreign operations was
approximately $1.6 million, $(1.1) million and $ 0.2 million.
As of October 31, 2019 and 2018, we had liability of $ 0.1 million and
$ 0.1 million for unrecognized tax benefits related to various foreign
income tax matters.
2019
2018
2017
Revaluation of deferred taxes
Notes To Consolidated Financial Statements
We are subject to U.S. federal income tax as well as income of
multiple state tax and foreign tax jurisdictions. We are no longer
subject to U.S. income tax examinations for the fiscal years prior
to October 31, 2016, and are no longer subject to state income tax
examinations for fiscal years prior to October 31, 2015.
10. SEGMENT INFORMATION
As discussed in Note 1, we report our operations in three
different business segments: (1) Fresh products, (2) Calavo Foods,
and (3) RFG. These three business segments are presented based on
how information is used by our Chief Executive Officer to measure
performance and allocate resources. The Fresh products segment
includes all operations that involve the distribution of avocados and
other fresh produce products. The Calavo Foods segment represents
all operations related to the purchase, manufacturing, and distribution
of prepared avocado products, including guacamole, and salsa. The
RFG segment represents operations related to the manufacturing
and distribution of fresh-cut fruit, fresh-cut vegetables and prepared
foods. Selling, general and administrative expenses, as well as other
non-operating income/expense items, are evaluated by our Chief
Executive Officer in the aggregate. We do not allocate assets, or
specifically identify them to, our operating segments.
The following table sets forth sales by product category, by segment (in thousands):
FRESH PRODUCTS
CALAVO FOODS
RFG
TOTAL
(All amounts are presented in thousands)
YE AR ENDED OC TOBER 31, 2 019
Net sales before intercompany eliminations
$
621,183
$
Intercompany eliminations
Net sales
Cost of sales before intercompany eliminations
Intercompany eliminations
Cost of sales
Gross profit
(2,246)
618,937
534,600
(2,013)
532,587
$
86,350
YE AR ENDED OC TOBER 31, 2 018
Net sales before intercompany eliminations
$
553,208
Intercompany eliminations
Net sales
Cost of sales before intercompany eliminations
Intercompany eliminations
Cost of sales
Gross profit
(1,554)
551,654
498,962
(1,468)
497,494
$
54,160
YE AR ENDED OC TOBER 31, 2 017
Net sales before intercompany eliminations
$
583,976
$
$
$
$
Intercompany eliminations
Net sales
Cost of sales before intercompany eliminations
Intercompany eliminations
Cost of sales
Gross profit
(1,314)
582,662
511,410
(1,124)
510,286
$
72,376
$
94,734
(3,957)
90,777
73,735
(3,122)
70,613
20,164
91,646
(3,472)
88,174
64,221
(2,360)
61,861
26,313
77,579
(3,184)
74,395
63,751
(2,709)
61,042
13,353
—
486,063
465,563
(1,068)
464,495
(6,203)
1,195,777
1,073,898
(6,203)
1,067,695
$
21,568
$
128,082
—
418,508
390,358
(665)
389,693
(4,498)
1,075,565
965,519
(4,498)
961,021
$
28,815
$
114,544
For fiscal year 2019, 2018 and 2017, inter-segment sales and cost
of sales of $1.8 million, $1.6 million and $1.3 million between Fresh
products and RFG were eliminated. For fiscal year 2019, 2018 and 2017,
inter-segment sales and cost of sales of $4.09 million, $ 3.5 million and
$ 3.2 million between Calavo Foods and RFG were eliminated. For the
year ended October 31, 2019 and 2018, inter-segment sales and cost
of sales of $ 0.5 million and $ 0.4 million between Fresh products and
Calavo Foods were eliminated.
C V G W / / 58-59
The following table sets forth sales by product category, by segment (in thousands):
THIRD-PAR T Y SALES:
Avocados
Tomatoes
Papayas
Other fresh products
Prepared avocado products
Salsa
Fresh-cut fruit & vegetables
and prepared foods
YEAR ENDED OCTOBER 31, 2019
YEAR ENDED OCTOBER 31, 2018
FRESH
PRODUCTS
CALAVO
FOODS
RFG
TOTAL
PRODUCTS
FRESH
CALAVO
FOODS
RFG
TOTAL
$
569,779
$
—
$
—
$
569,779
$
511,730
$
—
$
—
$
511,730
40,879
10,931
1,353
—
—
—
—
—
—
100,842
3,252
—
—
—
—
—
—
488,373
488,373
40,879
10,931
1,353
100,842
3,252
488,373
31,608
11,699
498
—
—
—
—
—
—
99,635
3,423
—
—
—
—
—
31,608
11,699
498
99,635
3,423
—
451,203
451,203
1,215,409
555,535
103,058
451,203
1,109,796
Less sales incentives
(1,759)
(9,360)
(2,310)
(13,429)
(2,327)
(11,412)
(2,273)
(16,012)
Less inter-company
eliminations
(2,246)
(3,957)
—
(6,203)
(1,554)
(3,472)
—
(5,026)
Net sales
$
618,937
$
90,777
$
486,063
$
1,195,777
$
551,654
$
88,174
$
448,930
$ 1,088,758
$
486,063
$
1,201,980
Total gross sales
622,942
104,094
$
448,930
$
1,093,784
THIRD-PAR T Y SALES:
—
448,930
416,985
(1,198)
415,787
(5,026)
1,088,758
980,168
(5,026)
975,142
$
33,143
$
113,616
Avocados
Tomatoes
Papayas
Other fresh products
Prepared avocado products
Salsa
Fresh-cut fruit & vegetables.
and prepared foods
$
418,508
$
1,080,063
Total gross sales
555,535
103,058
YEAR ENDED OCTOBER 31, 2018
YEAR ENDED OCTOBER 31, 2017
FRESH
PRODUCTS
CALAVO
FOODS
RFG
TOTAL
PRODUCTS
FRESH
CALAVO
FOODS
RFG
TOTAL
$
511,730
$
—
$
—
$
511,730
$
546,433
$
—
$
—
$
546,433
31,608
11,699
498
—
—
—
—
—
—
99,635
3,423
—
—
—
—
—
—
451,203
451,203
31,608
11,699
498
99,635
3,423
451,203
29,199
9,402
445
—
—
—
—
—
—
85,204
3,951
—
—
—
—
—
29,199
9,402
445
85,204
3,951
—
419,973
419,973
1,109,796
585,479
89,155
419,973
1,094,607
Less sales incentives
(2,327)
(11,412)
(2,273)
Less inter-company eliminations
(1,554)
(3,472)
—
(16,012)
(5,026)
(1,503)
(1,314)
(11,576)
(3,184)
(1,465)
(14,544)
—
(4,498)
Net sales
$
551,654
$
88,174
$
448,930
$
1,088,758
$
582,662
$
74,395
$
418,508
$ 1,075,565
Sales to customers outside the U.S. were approximately
Our goodwill balance of $18.3 million is attributed by segment
$42.5 million, $41.8 million and $29.8 million for fiscal years 2019, 2018,
and 2017.
to Fresh products for $ 3.9 million and RFG for $14.3 million as of
October 31, 2019 and 2018.
RFG segment sales included sales to one customer who
Long-lived assets attributed to geographic areas as of October 31,
represented more than 10% of total consolidated revenues for fiscal
2019, 2018 and 2017. Additionally, the Fresh products segment had sales
to one customer that represented more than 10% of total consolidated
revenues for fiscal 2019 and 2018.
are as follows (in thousands):
UNITED STATES
MEXICO
CONSOLIDATED
2019
2018
$
$
98,224
88,600
$
$
33,874
33,543
$
$
132,098
122,143
Notes To Consolidated Financial Statements
11. LONG-TERM OBLIGATIONS
Long-term obligations at fiscal year ends consist of the following
(in thousands):
Capital leases
Less current portion
2019
$
6,174
(762)
$
5,412
$
$
2018
432
(118)
314
In April 2019, we sold our Temecula, California packinghouse
for $7.1 million in cash and, concurrently, leased back a portion of
the facility representing approximately one-third of the total square
footage. This generated a gain of $ 6.4 million. Since our leaseback of
the building is classified as a capital lease and covers substantially all of
the leased property, the gain recognized currently is the amount of the
gain in excess of the recorded amount of the leased asset. As a result,
we recognized a gain of approximately $1.9 million in the second quarter
of fiscal 2019 and recorded a deferred gain of $4.5 million, which will
be recognized over the life of the lease. In connection with the capital
lease we capitalized $3.2 million as a capital lease in property, plant and
equipment and recorded a lease liability of $3.2 million ($ 0.1 million in
current portion and $3.1 million in long term debt).
During our third quarter of fiscal year 2019, we entered into a
10-year building and equipment lease for fresh food facility in Conley,
GA. This facility is primarily intended to process fresh-cut fruit &
vegetables and prepared foods products for our RFG business segment.
Annual rent for the building and equipment approximates $ 0.9 million
and $ 0.6 million, respectively, over the life of the lease. The lease
for the equipment is considered to be a capital lease, therefore, we
calculated the present value of the minimum lease payments related to
the equipment and capitalized $2.8 million as a capital lease in property,
plant and equipment and recorded $2.8 million as a lease obligation.
At October 31, 2019, capital lease payments are scheduled as
follows (in thousands):
YEAR ENDING OCTOBER 31:
2020
2021
2022
2023
2024
Thereafter
Minimum lease payments
Less interest
$
TOTAL
907
915
908
900
548
3,162
7,340
(1,166)
Present value of future minimum lease payments
$
6,174
12. STOCK-BASED COMPENSATION
The 2005 Stock Incentive Plan
The 2005 Stock Incentive Plan, was a stock-based compensation
plan, under which employees and directors could be granted options
to purchase shares of our common stock. In June 2012, this plan was
terminated without affecting the outstanding stock options related to
this plan.
Stock options were granted with exercise prices of not less than the
fair market value at grant date, generally vested over one to five years
and generally expired two to five years after the grant date. We settle
stock option exercises with newly issued shares of common stock.
We measured compensation cost for all stock-based awards
pursuant to this plan at fair value on the date of grant and recognize
compensation expense in our consolidated statements of income over
the service period that the awards are expected to vest. We measured
the fair value of our stock based compensation awards on the date
of grant.
A summary of stock option activity is as follows (in thousands,
except for per share amounts):
NUMBER OF
SHARES
WEIGHTED-
AVERAGE
EXERCISE
PRICE
AGGREGATE
INTRINSIC
VALUE
Outstanding at
October 31, 2018
Exercised
Outstanding at
October 31, 2019
Exercisable at
October 31, 2019
4
(2)
2
2
$
$
$
$
19.20
19.20
19.20
19.20
$
$
174
174
The weighted average remaining life of such outstanding options
is 0.8 years and the total intrinsic value of options exercised during
fiscal 2019 was $ 0.2 million. The weighted average remaining life of
such exercisable options is 0.8 years. The fair value of vested shares
as of October 31, 2019, and 2018 was approximately $ 0.2 million and
$ 0.4 million.
The 2011 Management Incentive Plan
In April 2011, our shareholders approved the Calavo Growers,
Inc. 2011 Management Incentive Plan (the 2011 Plan). All directors,
officers, employees and consultants (including prospective directors,
officers, employees and consultants) of Calavo and its subsidiaries are
eligible to receive awards under the 2011 Plan. Up to 1,500,000 shares
of common stock may be issued by Calavo under the 2011 Plan.
In January of fiscal 2019, 2018, and 2017, all 12 of our non-employee
directors were granted 1,750 restricted shares each (total of 21,000
shares). These shares have full voting rights and participate in
dividends as if unrestricted. The closing price of our stock were
$71.56, $ 85.90 and $ 62.65 for each respective year. After one year
since the grant date, as long as the directors are still serving on the
board, these shares lose their restriction and become non-forfeitable
and transferable. These shares were granted pursuant to our 2011
Plan. The total recognized stock-based compensation expense for
these grants were $1.6 million and $1.8 million for the year ended
October 31, 2019 and 2018.
On December 14, 2018, our executive officers were granted a
total of 14,522 restricted shares. On December 18, 2017, our executive
officers were granted a total of 25,241 restricted shares. On December
19, 2016, our executive officers were granted a total of 70,327
restricted shares. These shares have full voting rights and participate
in dividends as if unrestricted. The closing price of our stock on such
dates were $ 85.67, $75.45 and $ 56.20, respectively These shares vest
in one-third increments, on an annual basis, beginning December
14, 2019, December 18, 2018 and December 19, 2017. These shares
were granted pursuant to our 2011 Plan. The total recognized stock-
based compensation expense for these grants were $2.09 million and
$2.9 million for the year ended October 31, 2019 and 2018.
On January 6, 2017, our Chief Operating Officer resigned from
Calavo. His unvested portion of restricted stock of 12,800 shares issued
in December of 2016 and January of 2016 was forfeited. On January
25, 2017, as part of his resignation he was granted 12,800 shares of
unrestricted stock, which immediately vested. The closing price of our
stock on such date was $ 58.05. We recorded for this grant $ 0.7 million
of stock-based compensation expense in our fiscal first quarter of 2017.
On February 2, 2017, our Vice President of the Foods Division
retired from Calavo for medical reasons. In January 2017, the board of
directors agreed that his unvested portion of restricted stock of 13,040
shares shall be vested due to the medical reasons provision in the
restricted stock agreements. As a result, we recorded $ 0.5 million of
stock-based compensation expense in our fiscal first quarter of 2017.
In January 2018, per the terms of our 2011 Plan and the respective
employee award, the board of directors awarded the portion of the
fiscal 2017 management bonus for the percentage of the year worked.
As a result, he was granted 867 shares of unrestricted stock, which
immediately vested. As a result, we recorded $ 0.1 million of stock-
based compensation expense in our fiscal first quarter of 2018.
On October 31, 2017, a member of the management team at RFG
resigned. His unvested portion of restricted stock issued in December
of 2016 and January of 2016 was forfeited. On January 25, 2018, in
consideration of and in exchange for his forfeiture of restricted shares
upon his resignation, the board of directors granted 10,788 shares of
unrestricted stock, which immediately vested. The closing price of our
stock on such date was $ 87.10. We recorded for this grant $ 0.9 million
of stock-based compensation expense in our fiscal first quarter of 2018.
C V G W / / 60-61
A summary of stock option activity, related to our 2011
Management Incentive Plan, is as follows (in thousands, except for
per share amounts):
NUMBER OF
SHARES
WEIGHTED-
AVERAGE
GRANT
PRICE
AGGREGATE
INTRINSIC
VALUE
85
$
68.82
(51) $
35
69
$
$
70.48
77.33
71.74
$
5,996
Outstanding at
October 31, 2018
Vested
Granted
Outstanding at
October 31, 2019
The total recognized stock-based compensation expense for
restricted stock was $ 3.6 million and $4.6 million for the years ended
October 31, 2019 and 2018.
A summary of stock option activity, related to our 2011
Management Incentive Plan, is as follows (in thousands, except for per
share amounts):
NUMBER OF
SHARES
WEIGHTED-
AVERAGE
EXERCISE
PRICE
AGGREGATE
INTRINSIC
VALUE
Outstanding at
October 31, 2018
Exercised
Outstanding at
October 31, 2019
Exercisable at
October 31, 2019
20
$
40.07
(2) $
23.48
18
12
$
$
41.91
25.10
$
$
815
745
The weighted average remaining life of such outstanding
options is 3.7 years. The weighted average remaining life of such
exercisable options is 2.2 years. The fair value of vested shares as of
October 31, 2019 and 2018, was $ 0.7 million and $ 0.8 million.
13. DIVIDENDS
On October 1, 2019, the Company declared a $1.10 per share
cash dividend to shareholders of record on November 15, 2019. On
December 6, 2019, the Company paid this cash dividend which totaled
$19.4 million. On December 7, 2018, the Company paid a $1.00 per share
dividend in the aggregate amount of $17.6 million to shareholders of
record on November 16, 2018.
Notes To Consolidated Financial Statements
14. FAIR VALUE MEASUREMENTS
A fair value measurement is determined based on the assumptions
that a market participant would use in pricing an asset or liability.
A three-tiered hierarchy draws distinctions between market participant
assumptions based on (i) observable inputs such as quoted prices in
active markets (Level 1), (ii) inputs other than quoted prices in active
markets that are observable either directly or indirectly (Level 2) and (iii)
unobservable inputs that require the Company to use present value and
other valuation techniques in the determination of fair value (Level 3).
The following table sets forth our financial assets and liabilities as
of October 31, 2019 that are measured on a recurring basis during the
period, segregated by level within the fair value hierarchy:
Assets at Fair Value:
(All amounts are presented in thousands)
Investment in Limoneira Company(1)
Total assets at fair value
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$
$
31,734
31,734
—
—
—
—
$
$
31,734
31,734
(1) The investment in Limoneira Company consists of marketable securities in the Limoneira Company stock. We currently own less than 10% of Limoneira’s outstanding
common stock. These securities are measured at fair value by quoted market prices. Limoneira’s stock price at October 31, 2019 and October 31, 2018 equaled $18.92
per share and $24.65 per share (level 1). For the year ended October 31, 2019, we sold 51,271 shares of Limoneira stock and recorded a loss of $0.1 million in our
consolidated statements of income. Our remaining shares of Limoneira stock, totaling 1,677,299, were revalued to $18.92 per share at October 31, 2019 and, as a result,
we recorded a loss of $9.6 million for the year ended October 31, 2019 in our consolidated condensed statements of income. For the year ended October 31, 2018 and
2017, we recognized losses of Unrealized gains and losses are recognized through other comprehensive income. Unrealized investment holding gains arising during the
years ended October 31, 2018, and 2017 were $2.2 million and $6.3 million.
15. MEXICAN IVA TAXES RECEIVABLE
Included in other assets are tax receivables due from the Mexican
government for value-added taxes (IVA) paid in advance. CDM is
charged IVA by vendors on certain expenditures in Mexico, which,
insofar as they relate to the exportation of goods, translate into IVA
amounts receivable from the Mexican government.
As of October 31, 2019 and 2018, CDM IVA receivables totaled
$27.6 million and $21.9 million. Historically, CDM received IVA
refund payments from the Mexican tax authorities on a timely basis.
Beginning in fiscal 2014 and continuing into fiscal 2019, however, the
tax authorities began carrying out more detailed reviews of our refund
requests and our supporting documentation. Additionally, they are
also questioning the refunds requested attributable to IVA paid to
certain suppliers that allegedly did not fulfill their own tax obligations.
We believe these factors and others have contributed to delays in the
processing of IVA claims by the Mexican tax authorities. Currently,
we are in the process of collecting such balances through regular
administrative processes, but certain amounts may ultimately need to
be recovered via legal means and/or administrative appeals.
During the first quarter of fiscal 2017, tax authorities informed
us that their internal opinion, based on the information provided by
the local SAT office, considers that CDM is not properly documented
relative to its declared tax structure and therefore CDM cannot claim
the refundable IVA balance. CDM has strong arguments and supporting
documentation to sustain its declared tax structure for IVA and income
tax purposes. CDM started an administrative appeal for the IVA related
to the request of the months of July, August and September of 2015 (the
“2015 Appeal”) in order to assert its argument that CDM is properly
documented and to therefore change the SAT’s internal assessment.
In August 2018, we received a favorable ruling from the SAT’s central
legal department in Mexico City on the 2015 Appeal indicating that
they believe CDM’s legal interpretation of its declared tax structure
is indeed accurate. While favorable on this central matter of CDM’s
declared tax structure, the ruling, however, still does not recognize
the taxpayers right to a full refund for the IVA related to the months of
July, August and September 2015. Therefore, in October 2018, CDM
filed a substance-over-form annulment suit in the Federal Tax Court
to recover its full refund for IVA over the subject period, which is
currently pending resolution.
In spite of the favorable ruling from the SAT’s central legal
department in Mexico City, as discussed above, the local SAT office
continues to believe that CDM is not properly documented relative
to its declared tax structure. As a result, they believe CDM cannot
claim certain refundable IVA balances, specifically regarding our IVA
refunds related to January through December of 2013, January through
November of 2014, January through November 2015 and January 2017.
CDM has strong arguments and supporting documentation to sustain
its declared tax structure for IVA and income tax purposes. With
assistance of our internationally recognized tax advisory firm, during
2019 CDM has filed (or has plans to file shortly) administrative appeals
for the IVA related to the preceding months. A response to these
administrative appeals is currently pending resolution.
We believe that our operations in Mexico are properly documented.
Furthermore, our internationally recognized tax advisors believe that
there are legal grounds to prevail in the Federal Tax Court and that
therefore, the Mexican tax authorities will ultimately authorize the
refund of the corresponding IVA amounts.
16. FRESHREALM
Variable Interest Entity
Based on the NMUPA and related Agreements, as described in
Note 8, we reconsidered whether FreshRealm was a variable interest
entity (VIE) as of October 31, 2019 and 2018. A VIE refers to a legal
business structure in which an investor has a controlling interest in,
despite not having a majority of voting rights; or a structure involving
equity investors that do not have sufficient resources to support the
ongoing operating needs of the business. Due primarily to FreshRealm
utilizing substantially more debt to finance its activities, in addition to
its existing equity, we believe that FreshRealm should be considered
a VIE. In evaluating whether we are the primary beneficiary of
FreshRealm, we considered several factors, including whether we
(a) have the power to direct the activities that most significantly
impact FreshRealm’s economic performance and (b) the obligation to
C V G W / / 62-63
absorb losses and the right to receive benefits that could potentially
be significant to the VIE. We concluded that we were not the primary
beneficiary of FreshRealm at October 31, 2019 and 2018, because the
nature of our involvement with the activities of FreshRealm does not
give us the power to direct the activities that most significantly impact
its economic performance. We do not have a future obligation to fund
losses or debts on behalf of FreshRealm. We may, however, voluntarily
contribute funds. In the accompanying statements of income, we have
presented the income (loss) from unconsolidated entities, after the
provision for income taxes for all periods presented.
We record the amount of our investment in FreshRealm, totaling
$ 5.8 million and $19.9 million at October 31, 2019 and 2018, in
“Investment in unconsolidated entities” on our Consolidated Balance
Sheets and recognize losses in FreshRealm in “Income/(loss) in
unconsolidated entities” on our Consolidated Statement of Income.
For the year ended October 31, 2019 and 2018, FreshRealm incurred
losses totaling $ 30.6 million and $29.4 million, of which we recorded
$14.1 million and $12.09 million of non-cash losses during fiscal 2019
and 2018. Effective December 16, 2018, FreshRealm completed a
“check the box” tax election to change their entity classification
for tax purposes to that of a corporation. To effect this change,
FreshRealm, among other things, amended its operating agreement
to eliminate the appropriate language related to the flow-through tax
consequences of its prior tax status (Seventh Amended and Restated
LLC Agreement) and checked the appropriate box on Form 8832 which
it then filed with the Internal Revenue Service (IRS). As a result,
losses incurred by FreshRealm from November 1, 2018 to December 15,
2018 were recorded in accordance with FASB Accounting Standards
Codification (“ASC”) 810, ASC 323, and ASC 970, which mandate that
the recognition of losses for an unconsolidated subsidiary be handled
in a manner consistent with cash distributions upon liquidation of
the entity when such distributions are different than the investors
percentage ownership. As such, we recorded 100% of FreshRealm’s
losses from November 1, 2018 through December 15, 2018 totaling
$4.2 million. Losses incurred by FreshRealm from December 16, 2018
to October 31, 2019 (after the change in tax status was effective) were
recorded to reflect our proportionate share of FreshRealm losses. We
recorded losses from December 16, 2018 through October 31, 2019
totaling $ 9.9 million. As a result of FreshRealm’s recent change in tax
status (described above), future operating results for FreshRealm will
be allocated to its owners based on ownership percentage.
In fiscal 2019, certain FreshRealm employees left the company
surrendering their ownership units. This changed Calavo’s ownership
percentage slightly to approximately 38%.
Unconsolidated Significant Subsidiary
As described above, we own approximately 38% of FreshRealm
as of October 31, 2019. In accordance with Rules 3-09 and 4-08(g)
of Regulation S-X, we must determine if our unconsolidated
subsidiaries are considered, “significant subsidiaries”. In evaluating
our investments, there are three tests utilized to determine if our
subsidiaries are considered significant subsidiaries: the asset test,
the income test and the investment test. Rule 3-09 of Regulation S-X
requires separate audited financial statements of an unconsolidated
subsidiary in an annual report if any of the three tests exceed 20%.
Rule 4-08(g) of Regulation S-X requires summarized financial
information in an annual report if any of the three tests exceed 10%.
FreshRealm incurred losses totaling $ 30.6 million, of which we
recorded $14.1 million of non-cash losses during our fiscal year 2019.
Pursuant to Rule 3-09 of Regulation S-X, this requires separate audited
financial statements of FreshRealm in our Form 10-K. However,
because Calavo and FreshRealm have different fiscal year-ends,
the guidance in Rule 3-09(b)(2), as well our filing status, must be
considered in determining the due date for Calavo to file the financial
statements of FreshRealm in our Form 10-K. Since we are a large
accelerated filer, our 2019 Form 10-K is due by December 30, 2019.
Since FreshRealm’s fiscal year-end is December 31, we plan to file the
financial statements of FreshRealm as an amendment to our Form 10-K
within 90 days after FreshRealm’s year-end (i.e., by March 30, 2019).
Note that since Rule 3-09 of Regulation S-X financial statements
are not filed at the same time as our 2019 Form 10-K, we must include
Rule 4-08(g) summarized financial information in our 2019 Form 10-K.
The following tables show summarized financial information for
FreshRealm (in thousands):
Balance Sheet:
OCTOBER 31,
ASSE TS:
2019
2018
Cash and cash equivalents
$
961
$
814
Accounts receivable,
net of allowances
Inventories, net
Prepaid expenses and
other current assets
Property, plant, and
equipment, net
Other assets
LIABILITIES AND EQUIT Y:
Current liabilities
Debt to Calavo
Long-term liabilities
Equity
1,493
2,792
1,903
3,186
732
1,152
6,076
703
9,152
1,500
$
12,757
$
17,707
$
6,533
$
6,557
35,241
—
(29,017)
9,000
505
1,645
$
12,757
$
17,707
Income Statement:
12 MONTHS ENDED OCTOBER 31,
2019
2018
2017
Net sales
Gross loss
Selling, general
and administrative
Other
Net loss
$
24,112
$
33,769
$
16,933
(5,783)
(10,868)
(7,275)
(20,196)
(19,512)
(12,733)
(4,621)
1,023
(13)
$
(30,600)
$
(29,357)
$
(20,021)
Report of Independent Registered
Public Accounting Firm
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF CAL AVO GROWERS, INC.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Calavo Growers, Inc. and subsidiaries (the “Company”) as of October 31, 2019
and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows, for each of the three
years in the period ended October 31, 2019, and the related notes and the schedules listed in the Index at Item 15 (a) collectively referred to as the
“financial statements”. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
October 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2019, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 19, 2019, expressed an
unqualified opinion on the Company’s internal control over financial reporting.
Adoption of ASU No. 2016-01
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for certain equity investments
by recognizing the change in fair value in net income effective November 1, 2018 due to the adoption of Accounting Standards Update (“ASU”)
No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Mexican IVA taxes receivable — Refer to Note 15 to the Financial Statements
Critical Audit Matter Description
As of October 31, 2019, the Company has value-added taxes (IVA) receivable of $27.6 million from the Mexican government. Historically, the
Company’s subsidiary, Calavo de Mexico (CDM), received IVA refund payments from the Mexican tax authorities on a timely basis. Beginning in
fiscal 2014 and continuing into fiscal 2019, there have been delays in the processing of the IVA claims by the Mexican tax authorities. The Mexican
authorities informed the Company that CDM is not properly documented relative to its declared tax structure and therefore CDM cannot claim the
refundable IVA balance. Mexican authorities also questioned refunds requested attributable to IVA paid to certain suppliers that allegedly did not
fulfill their own tax obligations.
Given the significant judgments made by management to determine the Company’s ability to recover the IVA taxes receivable, performing audit
procedures to evaluate the Company’s interpretation and compliance with international tax laws involved significant auditor judgment and use of a
tax specialist with specialized skills and knowledge, which we have determined to be a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s judgments related to the collectability of the IVA taxes receivable included the following,
among others:
• We tested the effectiveness of the control over the recoverability of the Mexican IVA taxes receivable, along with the review of related
disclosures.
C V G W / / 64-65
• We obtained a confirmation from the Company’s tax advisors related to the collectability of the IVA receivable, and evaluated case rulings
supporting the recoverability of IVA taxes paid to non-compliant vendors.
Uncertain Tax Positions Related to Mexico tax audits — Refer to Note 7 to the Financial Statements
Critical Audit Matter Description
The Company is under audit by the Mexican tax authorities relating to the Company’s 2011 and 2013 fiscal years. The Mexican tax authorities have
assessed the Company with an underpayment of tax amounts alleging improper deductions for intercompany funding, deduction for services, and IVA
in the Company’s calculation of taxable income. The assessments, including the effect of inflation and penalties, amounted to $2.2 billion Mexican
pesos (approx. $114.4 million USD at October 31, 2019) and $2.6 billion Mexican pesos (approx. $135.1 million USD at October 31, 2019) relating to
the 2011 and 2013 audits, respectively. The Company filed administrative appeals to dismiss the assessments made by the Mexican tax authorities,
asserting that the positions taken by the Company are in accordance with tax regulations. No amounts have been accrued in the accompanying
financial statements related to these Mexico tax audits.
Given the significant judgments made by management in determining its analysis and accounting for the Company’s uncertain tax positions,
performing audit procedures to evaluate the Company’s interpretation and compliance with international tax laws involved significant auditor
judgment and use of tax specialists with specialized skills and knowledge, which we have determined to be a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination of whether it is more likely than not that the Company’s tax positions challenged by the
Mexican tax authorities will be realized included the following, among others:
• We tested the effectiveness of the control over the evaluation of Uncertain Tax Positions as it relates to the periods subject to the Mexico tax
audits, along with the review of related disclosures.
• We selected and reviewed a sample of source documents supporting management’s position on the Company’s accounting for intercompany
funding for product purchases and vendor-provided services.
• With the assistance of our tax specialists, we evaluated management’s assertion that the Company’s tax positions are more likely than not to
be realized by evaluating whether the Company’s declared tax structure is in compliance with Mexican tax regulations.
• We obtained a confirmation from the Company’s tax advisors related to understanding the advisor’s current assessment of the tax audits and
assessed the technical merits of tax positions taken by the Company.
Collectability of Notes Receivable from FreshRealm — Refer to Note 8 to the Financial Statements
Critical Audit Matter Description
The Company has $ 35.2M in notes receivable (including interest) due from FreshRealm, an unconsolidated entity. The notes are due on
November 1, 2021 with monthly interest payments scheduled to begin on October 31, 2020. The Company has the option to extend repayment of the
note receivable for up to two additional and separate one-year extension periods through to November 1, 2023 (in aggregate). The Company has no
allowance on these notes receivable due from FreshRealm as of October 31, 2019.
The Company’s evaluation of the collectability of the FreshRealm notes receivable includes consideration of qualitative factors, including
economic and business conditions, current operations, new customer agreements, and projections related to future operations. We identified
management’s evaluation of these factors as a critical audit matter as it required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the collectability of the FreshRealm notes receivable included the following, among others:
• We tested the effectiveness of the control over the evaluation of items used to determine the need for an allowance, including management’s
consideration and judgments related to the qualitative and quantitative assessment of the relevant facts and circumstances.
• We compared FreshRealm’s revenue and operating profit forecasts to:
– FreshRealm’s current business plan and nature of relationships with existing customers.
– Periodic operational communications from FreshRealm management to the Company’s management and the Board of Directors.
– Industry forecasts.
• We evaluated FreshRealm’s projections of future results that are based on expected growth by obtaining and reviewing select executed
customer contracts and purchase orders with large retailers and the related trend of purchase orders.
Costa Mesa, California
December 19, 2019
• With the assistance of our tax specialists, we evaluated the recoverability of the IVA receivable by evaluating the technical merits including
We have served as the Company’s auditor since 2015.
substantiating that the Company’s declared tax structure is in compliance with Mexican tax regulations.
Management’s Report on Internal Control
Over Financial Reporting
Report of Independent Registered
Public Accounting Firm
C V G W / / 66-67
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of the end of the
period covered by this report based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework).
Based on our evaluation under the framework set forth in Internal Control — Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of October 31, 2019. Our internal control over financial reporting as of October 31, 2019 has been
audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Lecil E. Cole,
Chairman of the Board of Directors,
and Chief Executive Officer
B. John Lindeman,
Chief Financial Officer
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF CAL AVO GROWERS, INC.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Calavo Growers, Inc. and subsidiaries (the “Company”) as of October 31, 2019,
based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as of and for the year ended October 31, 2019, of the Company and our report dated December 19, 2019, expressed
an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Costa Mesa, California
December 19, 2019
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
In March 2002, our common stock began trading on the OTC Bulletin Board under the symbol “CVGW.” In July 2002, our common stock began
trading on the Nasdaq National Market under the symbol “CVGW” and currently trades on the Nasdaq Global Select Market.
The following tables set forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq
Global Select Market.
FISCAL 2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
99.90
94.57
97.65
97.24
$
$
$
$
LOW
FISCAL 2018
$
$
$
$
70.57
75.59
84.88
84.93
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
89.40
98.50
97.85
107.15
$
$
$
$
LOW
69.35
82.75
83.85
92.70
$
$
$
$
As of November 30, 2019, there were approximately 776 stockholders of record of our common stock, which includes shareholders whose shares
were held in brokerage firms, depositories and other institutional firms in “street name.”
DIVIDEND POLICY
Our dividend policy is to provide for an annual dividend payment, as determined by the Board of Directors. We anticipate paying dividends in the
first quarter of our fiscal year.
On October 1, 2019, we declared a dividend of $1.10 per share. On December 6, 2019, we paid the aggregate amount of $19.4 million to
shareholders of record on November 15, 2019. On December 7, 2018, we paid a $1.00 per share dividend in the aggregate amount of $17.6 million to
shareholders of record on November 16, 2018.
Shareowner Return Performance Graph
The following graph compares the performance of our common stock with the performance of the Nasdaq Market Index and a Peer Group of
major diversified companies in our same industry for approximately the 60-month period beginning on October 31, 2014 and ending October 31, 2019.
In making this comparison, we have assumed an investment of $100 in Calavo Growers, Inc. common stock, the Nasdaq Market Index, the Peer Group
Index as of October 31, 2014. We have also assumed the reinvestment of all dividends.
COMPARISON OF 5-YEAR CUMUL ATIVE TOTAL RETURN
Among Calavo Growers, Inc., The NASDAQ Composite Index, and a Peer Group
$250
$200
$150
$100
$50
$0
10/14
10/15
10/16
10/17
10/18
10/19
Calavo Growers, Inc.
NASDAQ Composite
Peer Group
*$100 invested on 10/31/14 in stock or index, including reinvestment of dividends. Fiscal year ending October 31, 2019.
C V G W / / 68-69
Corporate Information
AUDIT COMMIT TEE
Egidio “Gene” Carbone, Jr.
Chairman
Steven W. Hollister
Michael A.“Mike” DiGregorio
Kathleen M. Holmgren
NOMINATING &
GOVERNANCE COMMIT TEE
Egidio “Gene” Carbone, Jr.
Chairman
Michael A.“Mike” DiGregorio
James D. Helin
COMPENSATION COMMIT TEE
Steven W. Hollister
Chairman
Michael A. “Mike” DiGregorio
Kathleen M. Holmgren
OPERATING DIRECTORS
& MANAGERS
Michael D. Hause
Director, Purchasing
and Risk Management
John Agapin
Director, Systems Analysis
and Planning
Patricia D. Vorhies
Director, Human Resources
Gary M. Gvvunther
Director, Fresh Operations
Special Projects
Marc Fallini
Director, California Avocado Operations
Joseph Malagone
Packinghouse Manager, Santa Paula
Francisco Orozco
Packinghouse Manager, Jalisco Mexico
HEADQUARTERS
Calavo Growers, Inc.
1141A Cummings Road
Santa Paula, California 93060
Telephone 805.525.1245
Fax 805.921.3219
www.calavo.com
GENERAL COUNSEL
Troy Gould PC
Los Angeles, California
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Costa Mesa, California
INVESTOR & CORPORATE
RELATIONS COUNSEL
FoleyFreisleben LLC
Los Angeles, California
FORM 10-K
A copy of the company’s annual
report as filed upon Form 10-K
is available upon request to the
Corporate Controller or online
from the Securities and Exchange
Commission at www.sec.gov.
TRANSFER AGENT & REGISTRAR
Computershare
462 South 4th Street
Suite 1600
Louisville, KY 40202
COMMON STOCK LISTING
Shares of the company’s common stock are
listed on the Nasdaq Global Select Market
under the symbol CVGW.
OFFICERS
Lecil E. Cole
Chairman of the Board, President
and Chief Executive Officer
B. John Lindeman
Chief Financial Officer and
Corporate Secretary
Rob Wedin
Vice President
Fresh Sales and Marketing
Mike Browne
Vice President
Fresh Operations
Ron Araiza
Vice President
Foods Division Sales
and Operations
James E. Gibson
President
Renaissance Food Group
James E. Snyder
Corporate Controller
Chief Accounting Officer
OFFICER—CAL AVO DE MEXICO
Dionisio Ortiz
Director of Operations
Calavo de Mexico
PRINCIPAL BOARD
COMMIT TEES
EXECUTIVE COMMIT TEE
Lecil E. Cole
Chairman
J. Link Leavens
First Vice Chairman
Scott N. Van Der Kar
Second Vice Chairman
Dorcas H. Thille
Donald “Mike” Sanders
Harold S. Edwards
CALAVO GROWERS, INC.
Calavo Growers, Inc. is a global avocado industry leader and expanding provider of value-added fresh food.
The company serves retail grocery, food service, club stores, mass merchandisers, food
distributors and wholesalers worldwide through its three principal operating segments: Fresh,
Renaissance Food Group, LLC (RFG) and Calavo Foods.
The Fresh segment procures and markets fresh avocados and other fresh produce (tomatoes and papayas).
The company procures avocados from California, Mexico, and other growing regions around the world to
satisfy year-round domestic demand, for export beyond North America to Asia and Europe,
as well as for use in Calavo Foods’ prepared products.
The RFG segment creates, markets and distributes a portfolio of healthy, fresh foods
including fresh-cut fruit and vegetables and an extensive array of prepared items sold through
the retail grocery channel.
The Calavo Foods business segment manufactures and distributes prepared items including fresh
refrigerated guacamole and other avocado products, as well as guacamole
hummus. Under the Calavo Salsa Lisa brand, the company produces and sells six varieties of wholesome
refrigerated fresh salsa made with all-natural ingredients.
Calavo products are sold under the company’s own respected brand name, as well as Garden Highway,
Chef Essentials and a variety of private label and store brands.
Founded in 1924 as a grower-owned cooperative, Calavo today is publicly traded on the Nasdaq Global Select
Market under the ticker symbol CVGW. Employing about 3,700 people, the company is headquartered in Santa
Paula, California, and operates packing, production and distribution facilities nationwide and in Mexico,
providing Calavo with one of the nation’s largest, most complete fresh-food infrastructure networks. These
include:
Three fresh avocado packinghouses (in Santa Paula, Michoacán, Mexico, and Jalisco, Mexico);
One fresh papaya packinghouse (in Hawaii);
Eight RFG production and distribution facilities (in Northern and Southern California, Oregon,
Texas, Indianapolis, Georgia, Florida and New Jersey);
Two Calavo Foods production facilities (in Michoacán, Mexico and Minnesota); and,
Four Value-Added Depots, distribution and sales (in Santa Paula, Texas, Florida and New Jersey).
OUR SENIOR MANAGEMENT TEAM
(from left to right) JAMES E. GIBSON President, Renaissance Food Group B. JOHN LINDEMAN Chief Financial Officer and Corporate Secretary ROB WEDIN Vice President,
Fresh Sales and Marketing RON ARAIZA Vice President, Foods Division Sales and Operations MIKE BROWNE Vice President, Fresh Operations
Designed: MC BrandStudios www.mc-brandstudios.com Creative Direction: Dan McNulty Concept/Editorial: Richard Huvard Editorial/Investor Relations: FoleyFreisleben LLC www.folfry.com
Photography: Marcelo Coelho www.marcelocoelho.com Printing: Jano Graphics www.janographics.com