Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number: 000-33385

CALAVO GROWERS, INC.

2530 Red Hill Avenue
Santa Ana, California 92705-5542
(Address of principal executive offices) (Zip code)

(949) 223-1111
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]   No  [   ]

Registrant’s number of shares of common stock outstanding as of January 31, 2003 was 12,929,909.

Table of Contents

CALAVO GROWERS, INC.

INDEX

2

Table of Contents

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(All amounts in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated condensed financial statements.

3

Table of Contents

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(All amounts in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated condensed financial statements.

4

Table of Contents

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated condensed financial statements.

5

Table of Contents

CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1. Description of the business

Business

Calavo Growers, Inc. (Calavo, the Company, we, us or our) procures and markets avocados and other perishable foods and prepares and distributes processed avocado products. Our expertise in marketing and distributing avocados, processed avocados, and other perishable foods allows us to deliver a wide array of fresh and processed food products to food distributors, produce wholesalers, supermarkets, and restaurants on a world-wide basis. Through our four operating facilities in Southern California and two facilities in Mexico, we sort and pack avocados procured in California and Mexico and prepare processed avocado products. Additionally, we procure avocados internationally, principally from Chile and New Zealand, and distribute other perishable foods such as Hawaiian grown papayas. We report these operations in three different business segments: California avocados, international avocados and perishable food products and processed products.

The accompanying consolidated condensed financial statements are unaudited. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments necessary to present fairly our financial position, results of operations, and cash flows. Such adjustments consist of adjustments of a normal recurring nature. Interim results are subject to significant seasonal variations and are not necessarily indicative of the results of operations for a full year. Our operations are sensitive to a number of factors including weather-related phenomena and their effects on industry volumes, prices, product quality and costs. Operations are also sensitive to fluctuations in currency exchange rates in both sourcing and selling locations as well as economic crises and security risks in developing countries. These statements should also be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2002.

Recent Accounting Standards

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset. SFAS 143 applies to all entities and amends FASB Statement No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies”. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The implementation of SFAS 143 had no impact on our consolidated condensed financial statements during the first quarter of fiscal 2003.

     In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). While SFAS 144 supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, it retains many of the fundamental provisions of that Statement. We adopted SFAS 144 on November 1, 2002. The implementation of SFAS 144 had no impact on our consolidated condensed financial statements during the first quarter of fiscal 2003.

     In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statement Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt” (“SFAS 4”) and amends other existing authoritative pronouncements. As a result of SFAS 145, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”). Applying the provisions of APB 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. We are currently analyzing SFAS 145;

6

Table of Contents

CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

however based on management’s current understanding and interpretation, SFAS 145 is not expected to have a material impact on our financial position or results of operations.

     In June 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 replaces Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 prospectively to exit or disposal activities initiated after December 31, 2002.

     In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others”, an interpretation of FASB Statement Nos. 5, 57 and 107, and rescission of FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others”. FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. 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. The maximum amount of potential future payments under such indemnifications is not determinable.

     In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-Based Compensation - Transition and Disclosure — an amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. We have not determined whether we will adopt the fair value based method of accounting for stock-based employee compensation.

     In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. We did not have any variable interest entities as of January 31, 2003. Furthermore, we are currently evaluating the provisions of the interpretation, but believe that adoption will not have a material impact on our consolidated results of operations or our financial position.

Reclassifications

     Certain prior year amounts have been reclassified to conform with the current period presentation.

7

Table of Contents

CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

2. Information regarding our operations in different segments

     We operate and track results in three reportable segments — California avocados, international avocados and perishable foods products, and processed products. These three business segments are presented based on our management structure and information used by the President to measure performance and allocate resources. The California avocados segment includes all operations that involve the distribution of avocados procured in California. The international avocados and perishable foods products segment includes both operations related to distribution of fresh avocados procured from Mexico, Chile and New Zealand and distribution of other perishable food items. The processed products segment represents all operations related to the purchase, manufacturing, and distribution of processed avocado products. Those costs that can be specifically identified with a particular product line are charged directly to that product line. Costs that are not segment specific are generally allocated based on five-year average sales dollars. We do not allocate assets or specifically identify them to our operating segments.

8

Table of Contents

CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

The following table sets forth sales by product category, by segment (in thousands):.

3. Inventories

Inventories consist of the following (in thousands):

During the three-month period ended January 31, 2003 and 2002, we did not record any provisions to reduce our inventories to the lower of cost or market.

4. Related-Party Transactions

     We sell papayas purchased from an entity owned by our Chairman of the Board of Directors, Chief Executive Officer and President. Sales of papayas amounted to approximately $602,000, and $763,000 for the three months ended January 31, 2003 and 2002, resulting in gross margins of approximately $60,000 and $92,000. Included in trade accounts payable and accrued liabilities are approximately $161,000, and $119,000 at January 31, 2003 and October 31, 2002 due to this entity.

9

Table of Contents

CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

     Each member of our Board of Directors markets avocados through Calavo pursuant to a marketing agreement that is similar to the marketing agreements that we entered into with other growers. During the three months ended January 31, 2003 and 2002, we paid $0.1 million and $1.1 million, in aggregate to members of the Board of Directors, including entities owned or controlled by the directors, with respect to avocados marketed through us.

5. Other Events

Dividend payment

     On January 2, 2003, we paid a $0.20 per share dividend to all shareholders of record as of November 15, 2002.

Exercise of stock options

     During the quarter ended January 31, 2003, 95,000 stock options were exercised, totaling $475,000.

Processed products restructuring

     On February 17, 2003, our Board of Directors approved a plan whereby our processed products operations would be restructured. The plan calls for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Uruapan, Michoacan in a time- frame of approximately six to nine months. We believe that this restructuring will provide cost savings in the elimination of certain transportation costs, elimination of duplicative overhead structures, and savings in the overall cost of labor and services.

     In connection with the restructuring, on February 13, 2003, we completed the purchase of a facility in Uruapan, Michoacan for approximately $900,000 that will be used to house our future processed products operations. We do not anticipate any material fixed asset impairment charges as a result of this restructuring. Other restructuring related expenses are expected throughout the remainder of fiscal 2003, but the amounts have not yet been determined.

Advances to avocado supplier

     On February 14, 2003, we advanced a supplier $1,800,000 in connection with the procurement of avocados during periods spanning our 2003 and 2004 fiscal years.

10

Table of Contents

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the year ended October 31, 2002 of Calavo Growers, Inc. (we, Calavo, or the Company). Certain prior year amounts have been reclassified to conform with the current period presentation.

Recent Developments

Dividend payment

     On January 2, 2003, we paid a $0.20 per share dividend to all shareholders of record as of November 15, 2002.

Exercise of stock options

     During the quarter ended January 31, 2003, 95,000 stock options were exercised, totaling $475,000.

Processed products restructuring

     On February 17, 2003, our Board of Directors approved a plan whereby our processed products operations would be restructured. The plan calls for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Uruapan, Michoacan in a time frame of approximately six to nine months. We believe that this restructuring will provide cost savings in the elimination of certain transportation costs, elimination of duplicative overhead structures, and savings in the overall cost of labor and services.

     In connection with the restructuring, on February 13, 2003, we completed the purchase of a facility in Uruapan, Michoacan for approximately $900,000 that will be used to house our future processed products operations. We do not anticipate any material fixed asset impairment charges as a result of this restructuring. Other restructuring related expenses are expected throughout the remainder of fiscal 2003, but the amounts have not yet been determined.

Advances to avocado supplier

     On February 14, 2003, we advanced a supplier $1,800,000 in connection with the procurement of avocados during periods spanning our 2003 and 2004 fiscal years.

11

Table of Contents

Net Sales

The following table summarizes our net sales by business segment:

Net sales for the first quarter of fiscal 2003, as compared to the same period in fiscal 2002, decreased by $1.5 million, or 3.3%. Our California avocado business generated only 27.5% of our consolidated net sales for the first quarter, as compared to 37.6% for the same prior year period. This decrease is partly attributable to a lower volume of avocados available for harvest in November and December of 2002 and the impact of a Mexfly Quarantine affecting the Valley Center, California growing area. This decrease in volume was partially offset by the delivery of avocados from our California growers in January 2003 in connection with high winds experienced in key growing areas. Conversely, our international avocados and perishable food products business showed significant revenue growth driven by the increases in the volume of avocados being imported from Chile and Mexico. Net sales generated by our processed products business are not subject to the seasonal effect experienced by our other operating segments. Sales to third parties from our processed products business have continued to generate comparable sales when compared to the same period in the prior year and have, therefore, continued to have comparable significance to our consolidated sales.

Net sales by segment include intercompany sales of avocados from our Uruapan packinghouse to our Mexicali processing plant, as well as value-added services billed by our Mexicali processing plant to our Santa Paula processing plant in processing fresh avocados into avocado pulp. All intercompany sales are eliminated in our consolidated results of operations.

California avocados

Net sales delivered by the business decreased by approximately $5.0 million, or 29.1%, for the first quarter of fiscal 2003, when compared to the same period for fiscal 2002. This decrease in sales reflects a decrease in avocados delivered by our growers of 22.8%, or 4.9 million pounds, when compared to the same prior year period. The decrease in the pounds delivered is attributable to a quarantine affecting the Valley Center, California growing area and a reduced 2002 carry-over crop being harvested in 2003 as compared to the same prior year period. Based on current estimates approximately 70.0 million pounds of avocados are included in the quarantine area of which we believe approximately 1.2 million pounds would have been harvested by us if the quarantine had not been present. In addition, our growers only delivered 0.3 million pounds of 2002 carry-over crop during the first quarter of fiscal 2003, as compared to 4.0 million pounds of 2001 carry-over crop for the same prior year period. Despite this decrease in volume, we have continued to build on our leadership role in packing and marketing California grown avocados and have increased our market share of first grade Hass variety avocados by approximately 3.2% to 42.9% in the first quarter of fiscal 2003 when compared to a 39.7% market share for the same prior year period. We believe

12

Table of Contents

that this increase in market share, during this time frame, reflects our continued focus on the California avocado crop during a period where most of our competitors handle Chilean grown avocados.

Average selling prices on a per case basis for first grade Hass variety avocados for the first quarter remained flat with a $0.02 increase per pound. This pricing structure reflects the impact of a smaller California avocado harvest offset by the effect of a larger volume of Chilean avocado imports in the marketplace.

We anticipate that our California Avocado business will experience a seasonal increase during the second fiscal quarter of 2003. We anticipate the additional influx of avocados located in the Valley Center, California growing area to occur in our second and third fiscal quarters as growers fulfill regulatory requirements and are permitted to harvest avocados within the quarantine area.

International and perishable food products

For the quarters ended January 31, 2003 and 2002, net sales include approximately $1.8 million and $1.7 million of intercompany sales between our Uruapan packinghouse and our Mexicali processing plant, which are eliminated in our consolidated condensed financial results. For the quarter ended January 31, 2003, when compared to the same period for fiscal 2001, sales to third-party customers increased by approximately $3.6 million, or 15.5%, from $23.0 million to $26.5 million.

The increased sales to third parties by our international and perishable food products business are primarily driven by the increased sales of Chilean and Mexican grown avocados in the U.S. marketplace. The volume of fruit handled increased by 4.6 million pounds of Chilean grown avocados, or 31.9% and 2.3 million pounds of Mexican grown avocados, or 25.0%, for the first quarter of fiscal 2003 when compared to the same prior year period. The increase in the volume of fruit handled by us was partially offset by a decrease in the average selling price per carton of approximately 17.8% and 1.4% for Chilean and Mexican avocados.

As planned, we anticipate that net sales for this segment will decrease in the second fiscal quarter of 2003. This is consistent with the cyclical nature of the availability of foreign sourced avocados in the U.S. marketplace. We anticipate that for the second fiscal quarter we will sell a significantly smaller volume of Chilean grown avocados offset by an increased volume of Mexican avocados. We will end the packing and importing of Mexican grown avocados on April 15, 2003, as required by rules established by the U.S. Department of Agriculture.

Processed products

For the quarters ended January 31, 2003 and 2002, net sales include approximately $1.0 million and $1.6 million of intercompany sales between our Mexicali and Santa Paula processing plants, which are eliminated in our consolidated financial results. For the quarter ended January 31, 2003 when compared to the same period for fiscal 2002, sales to third-party customers decreased by approximately $0.1 million, or 0.9%, from $5.6 million to $5.5 million. The decrease in sales is consistent with a decrease in total pounds of product sold of approximately 0.2 million pounds, or 6.6%, offset by a slight increase in average prices.

Our strategy to reverse the decrease in sales generated by our processed business includes the introduction of new products. Specifically, we have installed a new piece of equipment in our Mexicali, Mexico processing facility that subjects refrigerated processed avocado product to ultra-high pressure treatment. Processed avocado products that have been treated using this ultra-high pressure machinery generally have superior quality in that the texture and flavor is improved over frozen avocado products. The introduction of these refrigerated products continues to meet our sales expectations with total revenues in the first fiscal quarter of 2003 approximating $170,000. We believe that the introduction of this product will, in the long-term, successfully address a growing market segment and reverse the recent decline in our sales. However, there can be no assurances that we will be successful at developing competitive products and penetrating a marketplace that is currently dominated by an established competitor.

13

Table of Contents

Gross Margins

The following table summarizes our gross margins and gross profit percentages by business segment: