Calavo(CVGW) - 2021 Q2 - Quarterly Report

Forward-Looking Statements This section outlines forward-looking statements, emphasizing that future results may differ materially due to various risks including COVID-19, market volatility, and supply chain disruptions - Key risks include the ongoing impact of the COVID-19 pandemic on operations, supply chains, and consumer demand[7] - Business seasonality and sensitivity to market price changes for avocados and other agricultural products[7] - Potential supply chain disruptions, risks from future acquisitions, and cybersecurity threats[7] - Dependence on large customers and key personnel[7] - Risks associated with international operations, including trade protection measures and currency fluctuations[7] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited consolidated condensed financial statements, including balance sheets, statements of operations, cash flows, and shareholders' equity Consolidated Condensed Balance Sheets The balance sheet as of April 30, 2021, shows increased total assets, primarily from accounts receivable and inventories, alongside growth in total liabilities and shareholders' equity Consolidated Condensed Balance Sheet Highlights (in thousands) | Account | April 30, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Total current assets | $170,387 | $135,895 | | Total assets | $474,310 | $429,624 | | Total current liabilities | $95,584 | $106,331 | | Total liabilities | $202,568 | $173,622 | | Total shareholders' equity | $271,742 | $256,002 | Consolidated Condensed Statements of Operations Net sales for Q2 2021 slightly decreased, but net income significantly improved, largely due to an unrealized gain on Limoneira shares compared to a prior-year loss Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended April 30, 2021 | Three Months Ended April 30, 2020 | Six Months Ended April 30, 2021 | Six Months Ended April 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $276,821 | $281,166 | $497,399 | $554,516 | | Gross profit | $22,600 | $22,075 | $40,439 | $37,883 | | Operating income | $8,971 | $7,625 | $12,690 | $7,189 | | Net income (loss) attributable to Calavo | $8,841 | $(3,278) | $14,118 | $(4,216) | | Diluted EPS | $0.50 | $(0.19) | $0.80 | $(0.24) | Consolidated Condensed Statements of Cash Flows Net cash provided by operating activities significantly improved for the six months ended April 30, 2021, with investing activities primarily for property purchases Cash Flow Summary - Six Months Ended April 30 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $10,423 | $(3,022) | | Net cash used in investing activities | $(8,985) | $(25,810) | | Net cash provided by financing activities | $89 | $24,143 | | Net increase (decrease) in cash | $1,527 | $(4,689) | Notes to Consolidated Condensed Financial Statements These notes provide critical context, detailing segment performance, significant tax assessments from Mexican authorities, the FreshRealm separation, and the amendment of the company's credit facility Net Sales by Segment - Six Months Ended April 30 (in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | Fresh products | $275,902 | $303,358 | | RFG | $186,595 | $214,463 | | Calavo Foods | $34,902 | $36,695 | | Total Net Sales | $497,399 | $554,516 | - The company is contesting two tax assessments from Mexican authorities: a 2011 assessment for approximately $109.0 million USD and a 2013 assessment for approximately $128.8 million USD, which Calavo believes are without merit[72][76] - On February 3, 2021, Calavo terminated its equity ownership in FreshRealm and restructured its $34.5 million loan, with potential future payments up to $34 million contingent on FreshRealm achieving certain valuation milestones[97][99][101] - In January 2021, the company amended its credit facility, extending the maturity to January 2026 and increasing the revolving commitment from $80 million to $100 million[105] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, noting a slight decrease in Q2 2021 net sales but an increase in consolidated gross profit, alongside rising labor, commodity, and logistical costs Results of Operations Q2 2021 saw a slight decrease in net sales but an increase in gross profit, with varied performance across segments due to factors like avocado prices, cost pressures, and margin management Gross Profit by Segment (in thousands) | Segment | Three Months Ended April 30, 2021 | Three Months Ended April 30, 2020 | Six Months Ended April 30, 2021 | Six Months Ended April 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Fresh products | $15,008 | $14,405 | $28,153 | $20,987 | | RFG | $2,288 | $2,736 | $2,266 | $5,610 | | Calavo Foods | $5,304 | $4,934 | $10,020 | $11,286 | | Total Gross Profit | $22,600 | $22,075 | $40,439 | $37,883 | - The Fresh products segment's gross profit percentage increased in Q2 2021 due to more effective management of the spread between avocado sales prices and fruit costs[172] - RFG's gross profit declined due to increased commodity costs, labor shortages leading to higher overtime, and extraordinary weather events[177] - Selling, general and administrative (SG&A) expenses decreased by 6% in Q2 2021 and 10% in the six-month period, primarily due to lower staff-related costs and broker commissions[181][182] Non-GAAP Financial Measures The company provides non-GAAP metrics, with Adjusted Net Income and Adjusted EBITDA showing increases for Q2 2021, primarily after excluding unrealized gains/losses and unconsolidated entity losses Adjusted Net Income Reconciliation (in thousands) | Metric | Three Months Ended April 30, 2021 | Three Months Ended April 30, 2020 | | :--- | :--- | :--- | | Net income (loss) attributable to Calavo | $8,841 | $(3,278) | | Non-GAAP adjustments (net) | $(1,165) | $10,290 | | Adjusted net income | $7,676 | $7,012 | Adjusted EBITDA Reconciliation (in thousands) | Metric | Three Months Ended April 30, 2021 | Three Months Ended April 30, 2020 | | :--- | :--- | :--- | | Net income (loss) attributable to Calavo | $8,841 | $(3,278) | | Adjustments (Interest, Taxes, D&A, etc.) | $8,380 | $4,243 | | EBITDA | $17,221 | $965 | | Further Adjustments | $(2,217) | $12,746 | | Adjusted EBITDA | $15,004 | $13,711 | Liquidity and Capital Resources As of April 30, 2021, the company maintained strong liquidity with increased cash and working capital, supported by a substantial credit facility, deemed sufficient for future needs - Cash provided by operating activities was $10.4 million for the six months ended April 30, 2021, compared to cash used of $3.0 million in the prior year period[188] - Working capital stood at $74.8 million at April 30, 2021, a significant increase from $29.6 million at October 31, 2020[193] - The company has a $100 million credit facility expiring in January 2026, with $42.3 million outstanding as of April 30, 2021[194][196] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate fluctuations on its variable-rate credit facility and foreign currency exchange risk, particularly with the Mexican peso - The company is exposed to interest rate risk through its variable-rate credit facility[201] - Significant operations in Mexico expose the company to foreign currency risk, with a remeasurement loss of $0.5 million recorded in Q2 2021[204] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective, with no material changes to internal controls over financial reporting during the quarter - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective as of April 30, 2021[205] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course litigation but does not anticipate any current proceedings will materially impact its financial statements - The company is not aware of any legal proceedings that would have a material adverse impact on its financials[206] Item 1A. Risk Factors This section updates risk factors, highlighting increased labor, commodity, and logistical costs due to post-COVID economic recovery, expected to adversely affect operations - A key updated risk is the impact of the post-COVID economic climate, which is increasing costs for labor, commodities, and logistics, creating operational challenges[209][210] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company withheld common shares from officers in December 2020 and February 2021 to satisfy tax withholding obligations related to equity award settlements - In Q1 and Q2 2021, Calavo withheld a combined 14,112 shares from officers to cover tax obligations on vested equity awards[211] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the 2020 Equity Incentive Plan, FreshRealm separation agreements, and the third amendment to the credit agreement - Key exhibits filed include the 2020 Equity Incentive Plan, the Limited Liability Company Member Separation and Release Agreement with FreshRealm, and the Third Amendment to the Credit Agreement[213]