You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this quarterly report. This discussion and analysis contains forward-looking statements based upon our current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. Please refer to the section of this report under the heading "Forward Looking Statements."
We are a world leader in sourcing, producing and distributing fresh avocados, serving retail, wholesale and foodservice customers. We source, produce, pack and distribute avocados to our customers and provide value-added services including ripening, bagging, custom packing and logistical management. In addition, we provide our customers with merchandising and promotional support, insights on market trends and training designed to increase their retail avocado sales. We have two operating segments, which are also reporting segments. These reporting segments are Marketing and Distribution and International Farming. Our Marketing and Distribution reporting segment sources fruit from growers and then distributes the fruit through our global distribution network. Our International Farming segment owns and operates orchards from which substantially all fruit produced is sold to our Marketing and Distribution segment. The International Farming segment's farming activities range from cultivating early-stage plantings to harvesting from mature trees, and it also earns service revenues for packing and processing for producers of other crops during the avocado off-harvest season. The International Farming segment is principally located in
Peru, with smaller operations emerging in other areas of Latin America.
Implementation of the ERP system
November 1, 2021, we implemented a new enterprise resource planning ("ERP") system in our Marketing and Distribution segment to improve operational visibility and financial reporting capabilities. During implementation, we encountered significant challenges which limited our ability to effectively manage our business operations, thereby impacting our profitability and financial results for the first quarter of 2022. Our distribution centers and packing houses experienced problems with purchasing, receiving and shipping, which resulted in a high reliance on both third-party fruit and packaged fruit that we would have otherwise sourced directly in the field and packed in our facilities. Other issues included delays in automated customer invoicing and inventory management issues. During the second quarter of 2022, these operational issues we experienced during the first quarter were largely resolved. We continue to work with our third-party implementation firm to improve the system, and thus the financial impact during the second quarter was primarily limited to ongoing consulting costs.
The operating results of our businesses are significantly impacted by the price and volume of avocados we farm, source and distribute. In addition, our results have been, and will continue to be, affected by quarterly and annual fluctuations due to a number of factors, including but not limited to pests and disease, weather patterns, changes in demand by consumers, food safety advisories, the timing of the receipt, reduction, or cancellation of significant customer orders, the gain or loss of significant customers, the availability, quality and price of raw materials, the utilization of capacity at our various locations and general economic conditions. Our financial reporting currency is the
U.S.dollar. The functional currency of substantially all of our subsidiaries is the U.S.dollar and substantially all of our sales are denominated in U.S.dollars. A significant portion of our purchases of avocados are denominated in the Mexican Peso and a significant portion of our growing and harvesting costs are denominated in Peruvian Soles. Fluctuations in the exchange rates between the U.S.dollar and these local currencies usually do not have a significant impact on our gross margin because the impact affects our pricing by comparable amounts. Our margin exposure to exchange rate fluctuations is short-term in nature, as our sales price commitments are generally limited to less than one month and orders can primarily be serviced with procured inventory. Over longer periods of time, we believe that the impact exchange rate fluctuations will have on our cost of goods sold will largely be passed on to our customers in the form of higher or lower prices. 16
Three Months Ended Six Months Ended April 30, April 30, 2022 2021 2022 2021 (In millions, except for percentages) Dollars % Dollars % Dollars % Dollars % Net sales
$ 278.1100 % $ 234.7100 % $ 494.7100 % $ 407.9100 % Cost of sales 258.3 93 % 207.6 88 % 474.4 96 % 358.1 88 % Gross profit 19.8 7 % 27.1 12 % 20.3 4 % 49.8 12 % Selling, general and administrative expenses 18.7 7 % 16.3 7 % 37.4 8 % 30.9 8 % Operating income (loss) 1.1 - % 10.8
5% (17.1) (3)% 18.9 5% Interest expense
(1.1) - % (0.8) - % (2.0) - % (1.7) - % Equity method income (loss) 0.3 - % (0.2) - % 1.9 - % 2.1 1 % Other income (expense) 2.9 1 % (0.3) - % 4.5 1 % (0.3) - % Income (loss) before income taxes 3.2 1 % 9.5 4 % (12.7) (3) % 19.0 5 % Provision (benefit) for income taxes 0.8 - % 2.1 1 % (1.7) - % 9.4 2 % Net income (loss)
$ 2.41 % $ 7.43 % $ (11.0)(2) % $ 9.62 % Net sales Our net sales are generated predominantly from the shipment of fresh avocados to retail, wholesale and foodservice customers worldwide. Our net sales are affected by numerous factors, including the balance between the supply of and demand for our produce and competition from other fresh produce companies. Our net sales are also dependent on our ability to supply a consistent volume and quality of fresh produce to the markets we serve. Three Months Ended Six Months Ended April 30, April 30, (In millions) 2022 2021 2022 2021 Net sales: Marketing and Distribution $ 273.7 $ 232.4 $ 486.0 $ 402.0International Farming 4.4 2.3 8.7 5.9 Total net sales $ 278.1 $ 234.7 $ 494.7 $ 407.9Net sales increased $43.4 millionor 18% and $86.8 millionor 21% in the three and six months ended April 30, 2022compared to the same periods last year, respectively. Growth was driven by 44% and 46% increases in average per-unit avocado sales prices in the three and six months ended April 30, 2022, compared to the same periods last year, respectively, due to lower industry supply out of Mexico, as well as inflationary pressures. Partially offsetting price gains were decreases in avocado volume sold of 19% for both the three and six months ended April 30, 2022compared to the same periods last year, primarily driven by lower supply. Domestic volumes declined at a lower relative rate during these periods, demonstrating the resiliency of demand for avocados amid higher price points in the U.S. market. Gross profit Cost of sales is composed primarily of avocado procurement costs from independent growers and packers, logistics costs, packaging costs, labor, costs associated with cultivation (the cost of growing crops), harvesting and depreciation. Avocado procurement costs from third-party suppliers can vary significantly between and within fiscal years and correlate closely with market prices for avocados. While we have long-standing relationships with our growers and packers, we predominantly purchase fruit on a daily basis at market rates. As such, the cost to procure products from independent growers can have a significant impact on our costs. Logistics costs include land and sea transportation and expenses related to port facilities and distribution centers. Land transportation costs consist primarily of third-party trucking services to support North American distribution, while sea transportation cost consists primarily of third-party shipping of refrigerated containers from supply markets in South and Central Americato demand markets in North America, Europeand Asia. Variations in containerboard prices, which affect the cost of boxes and other packaging materials, and fuel prices can have an impact on our product cost and our profit margins. Variations in the production yields, and other input costs also affect our cost of sales. In general, changes in our volume of products sold can have a disproportionate effect on our gross profit. Within any particular year, a significant portion of our cost of products are fixed. Accordingly, higher volumes produced on company-owned farms directly reduce the average cost per pound of fruit grown on company owned orchards, while lower volumes directly increase the average cost per pound of fruit grown on company owned orchards. Likewise, higher volumes processed through packing and distribution facilities directly reduce the average overhead cost per unit of fruit handled, while lower volumes directly increase the average overhead cost per unit of fruit handled. 17
Three Months Ended Six Months Ended April 30, April 30, 2022 2021 2022 2021 Gross profit (in millions) $ 19.8 $ 27.1
$ 20.3$ 49.8 Gross profit as a percentage of sales 7.1 % 11.5 % 4.1 % 12.2 % Gross profit decreased $7.3 millionor 27%, in the three months ended April 30, 2022compared to the same period last year to $19.8 million, and gross profit percentage decreased 440 basis points to 7.1% of revenue. The decreases were primarily driven by the impact of lower avocado volume sold in our Marketing & Distribution segment, and its related impact on fixed cost absorption. In addition, we experienced gross profit decreases in the International Farming segment were due to the timing of cost incurred and impact of pricing at early-stage mango farms. The lower gross profit percentage was driven by higher per-unit sales prices, as per-unit margin represented a lower proportion of the sales value. Margin is primarily managed on a per-unit basis in our Marketing and Distribution segment, which can lead to significant movement in gross profit percentage when sales prices fluctuate. Gross profit decreased $29.5 millionor 59%, in the six months ended April 30, 2022compared to the same period last year to $20.3 million, and gross profit percentage decreased 810 basis points to 4.1% of revenue. The decreases were due to the same factors mentioned above, as well as temporary and unforeseen operational challenges created by the ERP implementation in our Marketing & Distribution segment during the first quarter of 2022, which limited our ability to effectively manage our supply chain.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily include costs associated with selling, professional fees, corporate overhead and other related administrative functions.
Three Months Ended Six Months Ended April 30, April 30, (In millions) 2022 2021 2022 2021 Selling, general and administrative expenses
$ 18.7 $ 16.3 $ 37.4 $ 30.9Selling, general and administrative expenses increased $2.4 millionor 15% in the three months ended April 30, 2022compared to the same period last year due to noncapitalizable costs associated with the implementation of our new ERP system in our Marketing and Distribution segment, higher employee-related costs driven by increased headcount and labor inflation and higher travel expenses as COVID-related travel restrictions have eased. Selling, general and administrative expenses increased $6.5 millionor 21% in the six months ended April 30, 2022compared to the same period last year due to the same factors above, as well as higher professional fees and certain transaction costs. Higher professional fees were in-part related to our change in SECfiler status from an emerging growth company to a large accelerated filer on October 31, 2021. Interest expense
Interest expense consists primarily of interest on borrowings under working capital facilities that we maintain and interest on other long-term debt used to make capital and equity investments.
Three Months Ended Six Months Ended April 30, April 30, (In millions) 2022 2021 2022 2021 Interest expense
$ 1.1 $ 0.8 $ 2.0 $ 1.7Interest expense increased $0.3 millionor 37.5% and $0.3 millionor 17.6% in the three and six months ended April 30, 2022compared to the same periods last year, respectively. The increases were primarily due to higher interest rates, as the majority of our outstanding debt is subject to variable rates.
Result according to the equity method
Our material equity method investees include Henry Avocado ("HAC"), Mr. Avocado, Moruga, and Copaltas. Three Months Ended Six Months Ended April 30, April 30, (In millions) 2022 2021 2022 2021
Equity method income (loss)
$ 0.3 $ (0.2)$
-------------------------------------------------------------------------------- Equity method income in the three months ended
April 30, 2022was $0.3 millioncompared to a loss of $0.2 millionin the same period last year, primarily due to higher earnings from HAC due to improved per-unit margins. Equity method income decreased $0.2 millionor 10% in the six months ended April 30, 2022compared to the same period last year as lower earnings from Moruga and Mr. Avocado were substantially offset by higher earnings from HAC. Moruga was affected by lower per-unit sales pricing, as well as higher farming costs associated with the replacement of certain farmable area with the intent of increasing yields.
Other income (expenses)
Other income (expense) consists of interest income, currency exchange gains or losses, interest rate derivative gains or losses and other miscellaneous income and expense items. Three Months Ended Six Months Ended April 30, April 30, (In millions) 2022 2021 2022 2021
Other income (expense)
$ 2.9 $ (0.3) $ 4.5 $ (0.3)Other income was $2.9 millionin the three months ended April 30, 2022compared to expense of $0.3 millionin the same period last year, and $4.5 millionin the six months ended April 30, 2022compared to expense of $0.3 millionin the same period last year. The changes were primarily due to gains on our interest rate swaps driven by market movements in short-term interest rates and lower losses on foreign currency transactions primarily between the U.S.dollar and Mexican peso compared to the same periods prior year.
Provision (benefit) for income taxes
The provision (benefit) for income taxes consists of the consolidation of tax provisions, computed on a separate entity basis, in each country in which we have operations. We recognize the effects of tax legislation in the period in which the law is enacted. Our deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years we estimate the related temporary differences to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. We recognize a tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are recognized within provision for income taxes. Three Months Ended Six Months Ended April 30, April 30, 2022 2021 2022 2021 Provision (benefit) for income taxes (in millions)
$ 0.8 $ 2.1 $ (1.7) $ 9.4Effective tax rate 25.0 % 22.1 % 13.4 % 49.5 %
Provision for income taxes decreased
We had an income tax benefit of
$1.7 millionin the six months ended April 30, 2022compared to a provision for income taxes of $9.4 millionfor the same period last year. The benefit from income taxes for the six months ended April 30, 2022was attributed to pre-tax losses recorded during the period. The prior year provision for income taxes included a discrete tax expense of $5.1 million, related to the remeasurement of our deferred tax liabilities in Perudue to the enactment of tax rate changes for future years.
Segment operating results
Our CEO evaluates and monitors segment performance primarily through segment sales and segment adjusted earnings before interest expense, income taxes and depreciation and amortization ("adjusted EBITDA"). We believe that adjusted EBITDA by segment provides useful information for analyzing the underlying business results as well as allowing investors a means to evaluate the financial results of each reportable segment in relation to the Company as a whole. These measures are not in accordance with, nor are they a substitute for or superior to, the comparable GAAP financial measures. Adjusted EBITDA refers to net income (loss), before interest expense, income taxes, depreciation and amortization expense, stock-based compensation expense, other income (expense), and income (loss) from equity method investees, further adjusted by asset impairment and disposals, net of insurance recoveries, farming costs for nonproductive orchards (which represents land lease costs), noncapitalizable ERP implementation costs, transaction costs, material legal settlements, and any special, non-recurring, or one-time items such as impairments that are excluded from the results the CEO reviews uses to assess segment performance and results. 19
-------------------------------------------------------------------------------- Net sales Marketing and International Marketing and International Distribution Farming Total Distribution Farming Total Three Months Ended April 30, (In millions) 2022 2021 Third party sales $ 273.7 $ 4.4
$ 278.1$ 232.4 $ 2.3 $ 234.7Affiliated sales - 2.6 2.6 - 2.0 2.0 Total segment sales 273.7 7.0 280.7 232.4 4.3 236.7 Intercompany eliminations - (2.6) (2.6) - (2.0) (2.0) Total net sales $ 273.7 $ 4.4 $ 278.1$ 232.4 $ 2.3 $ 234.7Six Months Ended April 30, 2022 2021 Third party sales $ 486.0 $ 8.7 $ 494.7$ 402.0 $ 5.9 $ 407.9Affiliated sales - 1.6 1.6 - 2.2 2.2 Total segment sales 486.0 10.3 496.3 402.0 8.1 410.1 Intercompany eliminations - (1.6) (1.6) - (2.2) (2.2) Total net sales $ 486.0 $ 8.7 $ 494.7$ 402.0 $ 5.9 $ 407.9Adjusted EBITDA Three Months Ended Six Months Ended April 30, April 30, (In millions) 2022 2021 2022 2021 Marketing and Distribution adjusted EBITDA $ 11.7 $ 16.2 $ 4.0 $ 29.9International Farming adjusted EBITDA (2.5) 0.1 (5.2) (1.1) Total reportable segment adjusted EBITDA 9.2 16.3 (1.2) 28.8 Net income (loss) 2.4 7.4 (11.0) 9.6 Interest expense 1.1 0.8 2.0 1.7 Provision (benefit) for income taxes 0.8 2.1 (1.7) 9.4 Depreciation and amortization 5.6 4.0 10.1 7.6 Equity method (income) loss (0.3) 0.2 (1.9) (2.1) Stock-based compensation 0.9 0.7 1.7 1.5 Legal settlement - 0.8 - 0.8 Asset impairment and disposals, net of insurance recoveries (0.1) - - - Farming costs for nonproductive orchards 0.3 - 0.8 - Noncapitalizable ERP implementation costs 1.3 - 2.8 - Transaction costs 0.1 - 0.5 - Other (income) expense (2.9) 0.3 (4.5) 0.3 Total adjusted EBITDA $ 9.2 $ 16.3 $ (1.2) $ 28.8Marketing and Distribution Net sales in our Marketing and Distribution segment increased $41.3 millionor 18% and $84.0 millionor 21% in the three and six months ended April 30, 2022, compared to the same periods last year, respectively. The increases were due to the same drivers impacting consolidated revenue. Segment adjusted EBITDA decreased $4.5 millionor 28% in the three months ended April 30, 2022compared to the same period last year due primarily to the impact of lower avocado volume sold on gross margin and higher selling, general and administrative expenses. Segment adjusted EBITDA decreased $25.9 millionor 87% in the six months ended April 30, 2022compared to the same period last year due to lower gross margin, attributed to ERP-related issues in the first quarter of 2022 and lower avocado volume sold, and higher selling, general and administrative expenses as described above. 20
Substantially all sales of fruit from our International Farming segment are to the Marketing and Distribution segment, with the remainder of revenue largely derived from services provided to third parties. Affiliated sales are concentrated in the second half of the fiscal year in alignment with the Peruvian avocado harvest season, which typically runs from April through August of each year. As a result, adjusted EBITDA for International Farming is generally concentrated in the third and fourth quarters of the fiscal year in alignment with sales. The Company operates approximately 300 hectares of mangos in
Peruthat are largely in an early-stage of production. The timing of the mango harvest is concentrated in the fiscal second quarter and, as a result, mangos have a more pronounced impact on segment financial performance during this timeframe. Net sales in our International Farming segment increased $2.1 millionor 91% and $2.8 millionor 47% in the three and six months ended April 30, 2022compared to the same periods last year, respectively, due to both higher third-party service revenue and higher mango harvest volumes. Segment adjusted EBITDA was $(2.5) millionin the three months ended April 30, 2022to compared to $0.1 millionin the same period last year primarily due to the timing of cost incurred and impact of pricing at early-stage mango farms. Segment adjusted EBITDA decreased $4.1 millionor 373% in the six months ended April 30, 2022to $(5.2) million, due to losses at early-stage mango farms that were mainly driven by lower than expected sales prices and higher costs associated with strategic initiatives in farming maintenance and operations that are intended to drive yield enhancements.
Cash and capital resources
Operating cash flows are seasonal in nature. We typically see increases in working capital during the first half of our fiscal year as our supply is predominantly sourced from
Mexicounder payment terms that are shorter than terms established for other source markets. In addition, we are building our growing crops inventory in our International Farming segment during the first half of the year for ultimate harvest and sale that will occur during the second half of the fiscal year. While these increases in working capital can cause operating cash flows to be unfavorable in individual quarters, it is not indicative of operating cash performance that we expect to realize for the full year. Six Months Ended April 30, (In millions) 2022 2021 Net (loss) income $ (11.0) $ 9.6Depreciation and amortization 10.1 7.6 Noncash lease expense 2.5 2.0 (1) Equity method income (1.9) (2.1) Stock-based compensation 1.7 1.5 Dividends received from equity method investees 2.2 - Losses (gains) on asset impairment, disposals and sales, net of insurance recoveries - 0.3 Deferred income taxes (0.1) 5.0 Other (2.7) 0.3 Changes in working capital (37.8) (44.4) (1) Net cash used in operating activities $ (37.0)
(1) Amounts for prior periods differ from those previously presented due to the adoption of ASC 842, Leases, in force
Net cash used in operating activities was higher by
$16.8 millionfor the six months ended April 30, 2022compared to the respective period last year, reflecting our net loss in fiscal 2022, partially offset by favorable net change in working capital. Within working capital, favorable changes in grower payables were partially offset by unfavorable changes in inventory. Changes in grower payables were due to higher fruit prices compared to prior year. Changes in inventory were due to increased per-box value of fruit on hand in North Americaand higher growing crop inventory in Peru, driven by inflationary pressures on farming costs and additional productive acreage, compared to last year. 21
Investing activities Six Months Ended April 30, (In millions) 2022 2021 Purchases of property and equipment
Proceeds from disposal of property, plant and equipment 2.9 2.3
Investment in equity method investees (0.3)
Loans to equity method investees -
Loan repayments from equity method investees 1.0
Net cash used in investing activities
In the six months ended
April 30, 2022, capital expenditures were concentrated in the purchase of farmland in Peruas well as land improvements and orchard development in Peruand Guatemala.
In the six months ended
Proceeds from the sale of property, plant and equipment in the six months ended
April 30, 2022were for land that had been originally intended for use as our corporate headquarters, and in the six months ended April 30, 2021, proceeds were primarily from the sale of two multi-unit housing properties in Californiathat had been used for housing seasonal avocado labor contractors.
In the six months ended
April 30, 2022and 2021, we made capital contributions to our joint venture Copaltas, to support the purchase of additional farmland in Colombia. We also received installment payments in both years on outstanding loans made to Moruga. In the six months ended April 30, 2022we also made a capital contribution to Mr. Avocado to support the addition of a new distribution facility in southern China. In the six months ended April 30, 2021we issued a $1.5 millionloan to Copaltas to support the working capital needs of the entity and received an installment payment on our outstanding loan to Moruga. Financing activities Six Months Ended April 30, (In millions) 2022 2021 Borrowings on revolving credit facility $ 20.0$ - Payments on revolving credit facility (20.0) - Principal payments on long-term borrowings (4.4)
Main payments on finance lease obligations (0.6) (0.6)
Net cash used in financing activities
Loans and debt repayments
We use a revolving line of credit for short-term working capital purposes. Principal repayments on our term loans and other notes payable are made in accordance with debt schedules.
Capital resources (In millions) April 30, 2022 October 31, 2021 Cash and cash equivalents $ 21.4 $ 84.5 Working capital(1) 126.3 157.9
(1) Includes cash and cash equivalents
Capital resources include cash flow from operations, cash and cash equivalents and debt financing.
We have a syndicated credit facility with
Bank of America, N.A., comprised of two term loans and a revolving credit facility ("revolver") that provides up to $100 millionin borrowings. The credit facility also includes a swing line facility and an accordion feature which allows us to increase the borrowings by up to $125 million, with bank approval. We did not have any outstanding borrowings under the revolver as of April 30, 2022and October 31, 2021. Interest on the revolver bears rates at a spread over LIBOR that varies with our leverage ratio. As of April 30, 2022and October 31, 2021, interest rates on the revolver were 2.45% and 1.84%, respectively. In April 2022, we entered into an amendment to our agreement for the credit facility, which, among other things provides for: (i) an increase to the maximum annual aggregate purchase consideration for a permitted acquisition from $20 millionto $30 million; (ii) an increase to the consolidated total net leverage ratio for the fiscal quarter ending April 30, 2022from 2.75:1.0 to 3.75:1.0 and for the fiscal quarter ending July 31, 2022, from 2.75:1.0 to 3.25:1.0; and (iii) certain other administrative updates. As of April 30, 2022, we were required to comply with the following financial covenants: (a) a quarterly consolidated leverage ratio of not more than 3.75 to 1.00 and (b) a quarterly consolidated fixed charge coverage ratio of not less than 1.50 to 1.00. As of April 30, 2022, our consolidated leverage ratio was 2.56 to 1.00 and our consolidated fixed charge coverage ratio was 1.68 to 1.00 and we were in compliance with all such covenants of the credit facility. The loans are secured by real property, personal property and the capital stock of our subsidiaries. We pay fees on unused commitments on the credit facility.
Material cash requirements
We have various capital projects in progress for farming expansion and facility improvements which we intend to fund through our operating cash flow as well as cash and cash equivalents on hand. For fiscal 2022, we do not expect a material deviation from amounts spent in recent fiscal years. Cash paid for capital expenditures for the years ended
October 31, 2021and 2020, were $73.4 millionand $67.3 million, respectively.
We are party to various operating leases for facilities, land, and equipment, for which our undiscounted cash liabilities were
$80.6 millionas of April 30, 2022. Long-term Debt
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