Calavo(CVGW) - 2022 Q4 - Annual Report

Part I Business Calavo Growers is a global avocado leader and fresh food provider, operating through its 'Grown' and 'Prepared' segments - On April 13, 2022, the company announced a business reorganization into two reporting segments: Grown (fresh avocados, tomatoes, papayas) and Prepared (fresh-cut produce, ready-to-eat meals, guacamole, salsa)[12] - The Grown segment sources avocados from California, Mexico, Peru, and Colombia, emphasizing year-round supply, value-added ripening, and packaging to serve large national accounts[15][17] - The Prepared segment utilizes ultra-high pressure technology for its guacamole products to ensure food safety and extend shelf-life without preservatives and offers a wide range of refrigerated fresh packaged foods[26][27] Employee Count as of October 31, 2022 | Location | Salaried | Hourly | Total | | :--- | :--- | :--- | :--- | | United States | 331 | 1,133 | 1,464 | | Mexico | 217 | 1,585 | 1,802 | | TOTAL | 548 | 2,718 | 3,266 | Risk Factors The company faces operational, financial, and regulatory risks, including supply chain issues and significant tax disputes - The company faces risks from the COVID-19 pandemic, including manufacturing and supply chain disruptions, increased costs, and potential impairment of goodwill and intangible assets[45][46][51] - A significant portion of revenue is derived from a small number of customers, with Kroger, Trader Joe's, and Wal-mart accounting for approximately 15%, 11%, and 10% of total net sales, respectively, in fiscal 2022[82] - The company is involved in a significant dispute with the Mexican Tax Administrative Service (SAT) regarding a 2013 tax assessment totaling approximately $151.5 million USD as of October 31, 2022[120] - As of October 31, 2022, the company has outstanding value-added tax (IVA) receivables from Mexican tax authorities totaling $43.6 million, with collection subject to significant delays and disputes[126] - The company has experienced recent transitions in key executive leadership positions, including the Chief Executive Officer and Chief Financial Officer, which presents integration and retention risks[92][93] Properties The company operates a network of owned and leased packinghouses and processing facilities across the US and Mexico - The company owns and leases multiple packinghouses and operating/distributing facilities throughout the United States, including locations in California, New Jersey, Texas, Florida, and Hawaii[154][156][157] - In Mexico, Calavo owns key facilities including a guacamole processing plant and a fresh avocado packinghouse in Uruapan, Michoacán, as well as a fresh avocado packinghouse in Ciudad Guzman, Jalisco[158] Legal Proceedings Information regarding legal proceedings is disclosed in Note 7 of the consolidated financial statements - For information on legal proceedings, the report refers to Note 7 of the consolidated financial statements[159] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (CVGW) underperformed key indices, and its dividend policy shifted from annual to quarterly - In November 2022, the company changed its dividend policy from an annual payment to a quarterly payment[166] Fiscal 2022 Quarterly Stock Price | Quarter | High | Low | | :--- | :--- | :--- | | First Quarter | $44.56 | $37.00 | | Second Quarter | $45.26 | $32.75 | | Third Quarter | $44.57 | $28.76 | | Fourth Quarter | $45.50 | $29.51 | 5-Year Cumulative Total Return Comparison | Index | 10/17 | 10/18 | 10/19 | 10/20 | 10/21 | 10/22 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Calavo Growers, Inc. | $100.00 | $133.32 | $120.44 | $94.44 | $57.47 | $50.85 | | NASDAQ Composite | $100.00 | $109.74 | $125.95 | $167.31 | $239.24 | $170.91 | | Peer Group | $100.00 | $99.81 | $105.14 | $155.34 | $138.82 | $113.39 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2022 saw increased sales and gross profit, but the company faced cost inflation and tax disputes - In October 2022, the company sold its entire investment in Limoneira common stock for gross proceeds of approximately $18.5 million, using the net proceeds to pay down debt[182] - The company continues to pursue its 'Project Uno' strategic initiatives, which are focused on operating efficiencies and cost savings to expand profit margins[188][190] - Regarding the 2013 Mexican tax assessment, the company maintains a provision of $11 million based on its cumulative probability analysis, despite believing the assessment is without merit[199][215] - The company was out of compliance with certain financial covenants in its credit facility as of October 31, 2021, and January 31, 2022, leading to several amendments that modified covenant terms[309][312][414] Net Sales by Segment (in thousands) | Segment | 2022 | % Change | 2021 | % Change | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | | Grown | $700,270 | 19% | $588,527 | 1% | $585,052 | | Prepared | $492,868 | 5% | $469,800 | (1)% | $475,970 | | Less intercompany elimins. | ($2,065) | (17)% | ($2,497) | 51% | ($1,651) | | Total net sales | $1,191,073 | 13% | $1,055,830 | (0)% | $1,059,371 | Gross Profit by Segment (in thousands) | Segment | 2022 | % Change | 2021 | % Change | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | | Grown | $50,165 | 5% | $47,787 | 0% | $47,563 | | Prepared | $23,680 | 146% | $9,638 | (77)% | $42,335 | | Total gross profit | $73,845 | 29% | $57,425 | (36)%| $89,898 | Quantitative and Qualitative Disclosures About Market Risk Primary market risks include interest rate changes and foreign currency fluctuations, particularly the USD/MXN rate - The company's Mexican-based operations expose it to foreign currency risk, with total foreign currency translation losses of $1.0 million in fiscal 2022, compared to a gain of $0.9 million in 2021[321] - The company does not use derivative instruments, hedging, or forward contracts to offset market volatility related to interest rates or foreign currency[320] Financial Statements and Supplementary Data This section presents audited financial statements, with critical audit matters related to Mexican tax issues - The independent auditor, Deloitte & Touche LLP, identified two critical audit matters: the recoverability of Mexican IVA taxes receivable and the accounting for uncertain tax positions related to the 2013 Mexican tax audit[546][547][549] - As of October 31, 2022, the company had a goodwill balance of $28.7 million, with $4.0 million attributed to the Grown segment and $24.7 million to the Prepared segment[468] Consolidated Statement of Operations Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $1,191,073 | $1,055,830 | $1,059,371 | | Gross profit | $73,845 | $57,425 | $89,898 | | Operating income (loss) | $5,987 | ($9,997) | $32,162 | | Net loss attributable to CVGW | ($6,249) | ($11,818) | ($13,625) | | Diluted EPS | ($0.35) | ($0.67) | ($0.78) | Consolidated Balance Sheet Highlights (in thousands) | Metric | Oct 31, 2022 | Oct 31, 2021 | | :--- | :--- | :--- | | Total current assets | $125,674 | $152,641 | | Total assets | $385,746 | $445,402 | | Total current liabilities | $101,953 | $114,624 | | Total liabilities | $162,375 | $218,519 | | Total shareholders' equity | $223,371 | $226,883 | Part III Directors, Executive Officers, and Corporate Governance Information on directors and governance is incorporated by reference from the Proxy Statement - Detailed information required for Part III (Items 10-14) is incorporated by reference from the company's definitive Proxy Statement[571] - Brian Kocher has served as CEO since February 2022, and Shawn Munsell has served as CFO since June 2022, indicating recent changes in top leadership[573][574] Executive Compensation Details on executive and director compensation are incorporated by reference from the Proxy Statement - The information required by this item is incorporated by reference from the sections entitled 'Executive Compensation' and 'Directors’ Compensation' in the Proxy Statement[580] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity plan information is incorporated by reference from the Proxy Statement - The information required by this item is incorporated by reference from the sections entitled 'Security Ownership of Certain Beneficial Owners and Management' and 'Equity Compensation Plan Information' in the Proxy Statement[580] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions is incorporated by reference from the Proxy Statement - The information required by this item is incorporated by reference from the section entitled 'Certain Relationships and Related Transactions' in the Proxy Statement[581] Principal Accountant's Fees and Services Details on principal accountant fees and services are incorporated by reference from the Proxy Statement - Information required by this item is incorporated by reference to the section of the Proxy Statement entitled 'Principal Accountant Fees and Services'[582] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the report - This section provides a comprehensive index of all exhibits filed with the Form 10-K, including merger agreements, bylaws, credit agreements, and executive employment contracts[584][588]