Mission Produce, Inc. (AVO) FY 2022 MD&A

Item 7.        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 our financial statements and related notes included elsewhere in this annual 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.”

Overview

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 and a small amount of other fruits to our customers and provide value-added services including ripening, bagging, custom packaging 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.

18

Consolidation of VIE

On May 1, 2022, a reconsideration event occurred related to Moruga S.A.C., a holding company with one wholly owned subsidiary Blueberries Peru, S.A.C. (collectively referred to as “Moruga”), an entity for which we have a 60% equity ownership interest. Moruga was previously accounted for under the equity method of accounting, where investments are stated at initial cost and adjusted for subsequent additional investments and our proportionate share of earnings or losses and distributions. As a result of the reconsideration event, we concluded that Moruga is a variable interest entity (“VIE”), and that the Company is the primary beneficiary with a controlling financial interest. Based on this conclusion, Moruga was prospectively consolidated on May 1, 2022. For more details on Moruga, refer to Note 3 to the financial statements in this annual report.

Reportable segments

We have three operating segments which are also reportable segments. Our reportable segments are presented based on how information is used by our CEO, who is the chief operating decision maker, to measure performance and allocate resources. After the consolidation of Moruga on May 1, 2022, the information used by the CEO was expanded to include the results of Moruga, and as such, we determined our reportable segments to be:

•Marketing and Distribution. Our Marketing and Distribution reportable segment sources fruit from growers and then distributes the fruit through our global distribution network.

•International Farming. International Farming owns and operates orchards from which substantially all fruit produced is sold to our Marketing and Distribution segment. Its farming activities range from cultivating early-stage plantings to harvesting from mature trees, and it also earns service revenues for packing and processing for our Blueberries segment, as well as for third-party producers of other crops during the avocado off-harvest season. Operations are principally located in Peru, with smaller operations emerging in other areas of Latin America.

•Blueberries. The new Blueberries segment represents the results of Moruga, subsequent to its consolidation on May 1, 2022. Moruga’s farming activities include cultivating early-stage blueberry plantings and harvesting mature bushes. Substantially all of blueberries produced are sold to a single distributor under an exclusive marketing agreement.

Recent developments

Marketing and Distribution

On November 1, 2021, we implemented a new enterprise resource planning (“ERP”) system 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.

International Farming

As vertical integration is a key part of our sourcing strategy, we have continued to make investments in orchard development and land improvements in Peru, Guatemala and Colombia. After planting, our avocado trees begin to produce avocados in approximately three years and reach full production in approximately five to seven years, depending on location. As of October 31, 2022, we had approximately 12,000 acres planted across these locations.

During the fourth quarter of fiscal 2022, we recorded a $49.5 million noncash impairment loss in the consolidated statements of (loss) income to reduce the carrying amount of goodwill associated to our Peruvian farming reporting unit within the International Farming reportable segment. Refer to Note 4 to the consolidated financial statements in this annual report for more information.

Blueberries

As noted above, we consolidated Moruga on May 1, 2022, and in connection, announced plans for a new capital project to plant approximately 1,500 additional acres of blueberry farms in Peru. We are currently in the planning phase of this project and expect planting to commence during fiscal 2023. Our operations in Moruga enable us to utilize our existing infrastructure and workforce in Peru during the complementary periods between avocado harvest and processing seasons.

19

Results of Operations

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.

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.

Net sales increased $154.2 million or 17% in fiscal year 2022 compared to the previous year, primarily due to a 28% increase in average per-unit avocado sales prices, partially offset by decreases in avocado volume sold of 11%. Price increases were due to lower industry supply out of Mexico for much of the fiscal year, as well as inflationary pressures. Lower avocado volume sold was primarily driven by lower Mexican supply. Domestic volumes declined at a lower rate relative to export markets, demonstrating the resiliency of demand for avocados amid higher price points in the U.S. market.

20

Net sales increased $29.4 million or 3% in fiscal year 2021 compared to fiscal year 2020, primarily due to a 5% increase in avocado volume sold, partially offset by a 2% decrease in average per-unit avocado sales prices, both of which were driven by increased supply from Mexico and Peru. Higher volumes and lower pricing were concentrated in the first half of 2021 when Mexico was the country of origin for the majority of the fruit sold.

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 America to demand markets in North America, Europe and 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.

Gross profit percentage will fluctuate based upon per-unit sales price levels in relation to per-unit costs. Margin is primarily managed on a per-unit basis in our Marketing & Distribution segment, which can lead to movement in gross profit percentage when sales prices fluctuate.

Gross profit decreased $34.7 million in fiscal year 2022 compared to fiscal year 2021 to $89.8 million, and gross profit percentage decreased by 536 basis points to 8.6% of revenue. Within our Marketing and Distribution segment, the decreases were primarily driven by the impact of lower avocado volume sold, as well as temporary and unforeseen operational challenges created by the ERP implementation, which limited our ability to effectively manage our supply chain during the first quarter of 2022. Within our International Farming segment, we experienced gross profit decreases primarily due to inflationary cost pressures impacting ocean freight costs, packaging costs, and farming input costs, partially offset by increased avocado production at our farms.

Gross profit was nearly flat in fiscal year 2021 compared to fiscal year 2020 at $124.5 million, and gross profit percentage decreased by 40 basis points to 14.0% of revenue. The declines were due to lower per-unit margins related to sourcing of Californian and Mexican fruit, which were exacerbated by lower industry volumes from the California market as well as smaller fruit sizes from the Mexican market. Additionally, gross margin was impacted by incremental infrastructure costs related to our new Laredo facility within the Marketing & Distribution segment, which was still in the process of ramping up utilization. Gross margin was also negatively impacted by widespread port delays in the fourth quarter of 2021, which created quality issues related to the extended age of inventory on late-season fruit which impacted sales returns. These impacts were substantially offset by higher volume of avocados sold from Company-owned farms within our International Farming segment compared to 2020, which had lower per-unit cost than fruit purchased from third-party growers.

Selling, general and administrative expenses

Selling, general and administrative expenses primarily include the costs associated with selling, professional fees, general corporate overhead and other related administrative functions

21

Selling, general and administrative expenses increased $13.9 million or 22% in fiscal year 2022 compared to fiscal year 2021 due to ERP costs in our Marketing and Distribution segment, higher employee-related costs, higher professional fees, and higher travel costs. ERP costs consisted of noncapitalizable implementation costs and nonrecurring process re-engineering costs. Employee-related costs were impacted by labor inflation and higher stock-based compensation expense. Higher professional fees were in-part due to our change in SEC filer status from an emerging growth company to a large accelerated filer on October 31, 2021. Travel costs increased as COVID-related travel restrictions eased relative to prior year. The consolidation of Moruga increased selling, general and administrative expenses by $1.7 million, which included amortization of an intangible asset recognized at acquisition.

Selling, general and administrative expenses increased $7.4 million or 13% in fiscal year 2021 compared to fiscal year 2020 due primarily to higher professional fees and higher liability insurance premiums associated with being a public company and the change in SEC filer status referenced above. Other factors included an increase in rent expense in conjunction with our move to our new corporate headquarters in February 2021, and a legal settlement contingency of $0.8 million, partially offset by a $0.9 million gain from an insurance settlement, net of asset impairment and disposals.

Goodwill impairment

A noncash impairment loss of $49.5 million was recognized in the consolidated statements of income during the fourth quarter of fiscal 2022. No goodwill impairment was recognized in fiscal years 2021 or 2020. For more information, refer to Note 4 to the consolidated financial statements.

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.

Interest expense increased $1.8 million or 49% in fiscal year 2022 compared to fiscal year 2021 primarily due to higher interest rates, as the majority of our outstanding debt is subject to variable rates.

Interest expense decreased $3.0 million or 45% in fiscal year 2021 compared to fiscal year 2020 due to a combination of lower interest rates and lower average principal balances. A substantial portion of our debt had variable interest rates that were based on LIBOR, which declined significantly from 2020 to 2021.

Equity method income

Our material equity method investees include Henry Avocado (“HAC”), Mr. Avocado, Copaltas, and up until May 1, 2022, Moruga. On May 1, 2022, Moruga became a variable interest entity and prospectively consolidated into our financial statements.

Equity method income decreased $2.4 million or 32% in fiscal year 2022 compared to fiscal year 2021, primarily due to the effect of consolidation of Moruga, partially offset by stronger operating performance from HAC.

Equity method income increased $3.5 million or 88% in fiscal year 2021 compared to fiscal year 2020, driven by higher earnings from investments in Moruga and HAC. Moruga’s earnings increased due to higher blueberry volume attributed to improved yields and better pricing returns. HAC’s earnings increased due to higher per-unit margins. The impact of COVID-19 related stay at-home orders that went into effect in March 2020 were more profound to HAC due to their heavier concentration of foodservice customers.

Other income (expense), net

Other income (expense), net consists of interest income, currency exchange gains or losses, interest rate derivative gains or losses and other miscellaneous income and expense items.

22

Other income increased $3.1 million or 238% in fiscal year 2022 compared to the previous year, primarily due to gains on our interest rate swaps driven by market movements in short-term interest rates. The interest rate swaps are intended to hedge against variable interest rate exposure associated with our term debt facility.

Other income in fiscal year 2021 was $1.3 million, compared to other expense of $0.7 million in fiscal year 2020. The $2.0 million change was primarily due to losses on interest rate swaps in 2020, driven by market movements in short-term interest rates, partially offset by the effect of foreign currency loss in 2021 compared to gains in 2020. The significant weakening of the Mexican peso relative to the U.S. dollar and the substantial reduction in LIBOR in fiscal 2020 were correlated with the COVID-19 pandemic.

Provision for income taxes

The provision 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.

(1)May not sum due to rounding.

The provision for income taxes decreased $17.4 million or 82% in fiscal year 2022 compared to fiscal year 2021. In 2022, our provision for income taxes was impacted by the $49.5 million non-deductible goodwill impairment charge, which generated a pre-tax loss. In 2021, the provision for income taxes included a $5.4 million charge from the remeasurement of our deferred tax balances in Peru due to the enactment of tax law repealing tax benefits to agribusiness entities. The new law was enacted on December 30, 2020, and will subject us to higher Peruvian corporate income tax rates than our current rate of 15% as follows: 20% for calendar years 2023 to 2024, 25% for calendar years 2025 to 2027, and 29.5% thereafter.

The provision for income taxes increased $6.1 million or 41% in fiscal year 2021 compared to fiscal year 2020, primarily due to remeasurement of our deferred tax balances in Peru due to the enactment of tax rate changes as described above. The deferred tax balances were remeasured based on the applicable tax rate in the year the deferred balances are expected to reverse, resulting in a net deferred tax liability increase of $5.4 million, which also increased income tax expense by the same amount. The effective tax rate decreased by 2.2% in fiscal year 2021 over fiscal year 2020. The decrease was primarily due to the nondeductible impairment of Moruga in fiscal year 2020, partially offset by increases in the Peruvian tax rates.

Segment Results of Operations

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), certain noncash and nonrecurring ERP costs, transaction costs, material legal settlements, amortization of inventory adjustments recognized from business combinations, and any special, non-recurring, or one-time items such as remeasurements or impairments, and

23

any portion of these items attributable to the noncontrolling interest, all of which are excluded from the results the CEO reviews uses to assess segment performance and results.

Net sales

Adjusted EBITDA

(1)Includes $1.4 million of depreciation and amortization on purchase accounting assets including property, plant and equipment step-up and an intangible asset for the year ended October 31, 2022.

(2)Includes recognition of deferred implementation costs and non-recurring post-implementation process reengineering costs.

(3)Represents net loss attributable to noncontrolling interest plus the impact of non-GAAP adjustments, allocable to the noncontrolling owner based on their percentage of ownership interest.

Marketing and Distribution

Net sales in our Marketing and Distribution segment increased $144.1 million or 17% in fiscal year 2022 compared to fiscal year 2021, due to the same drivers impacting consolidated revenue.

Segment adjusted EBITDA decreased $27.9 million or 54% in fiscal year 2022 compared to fiscal year 2021 due to the impact of lower avocado volume sold, lower gross margin primarily attributed to ERP-related issues during the first quarter of 2022, and higher selling, general and administrative expense as described above.

24

Net sales in our Marketing and Distribution segment increased $25.1 million or 3% in fiscal year 2021 compared to fiscal year 2020, due to the same drivers impacting consolidated revenue.

Segment adjusted EBITDA decreased $16.8 million or 25% in fiscal year 2021 compared to fiscal year 2020 due to lower gross margins and higher selling, general and administrative expenses. Gross margin was impacted by tighter per-unit margins related to the sourcing of Californian and Mexican fruit, which were exacerbated by smaller industry volumes within the California market as well as smaller fruit sizes within the Mexican market. Additionally, gross margin was pressured by incremental infrastructure costs related to our new Laredo facility, which was still in the process of ramping up utilization. Selling, general and administrative expenses increased due to the same factors as described above.

International Farming

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 and our Blueberries segment. 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 the International Farming segment is generally concentrated in the third and fourth quarters of the fiscal year in alignment with the timing of sales. The Company operates approximately 700 acres of mangos in Peru that 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.

Total segment sales in our International Farming segment increased $10.1 million or 10% in fiscal year 2022 compared to fiscal year 2021, driven by increased avocado production of 15%, which increased affiliated sales.

Segment adjusted EBITDA decreased $10.6 million or 31% in fiscal year 2022 compared to fiscal year 2021, primarily due to inflationary cost pressures impacting ocean freight costs, packaging costs, and farming input costs, partially offset by increased avocado production at our farms, as well as losses at early-stage mango farms that were mainly driven by lower sales prices and production yields.

Total segment sales in our International Farming segment increased $22.8 million or 28% in fiscal year 2021 compared to fiscal year 2020, due to a 33% increase in fruit volumes resulting from improved harvest yields at our maturing orchards, partially offset by a 3% decrease in average sales prices. Net sales increased $4.3 million or 28% in fiscal year 2021 compared to fiscal year 2020, primarily due to higher packing and processing service revenue for third-party growers.

Segment adjusted EBITDA increased $10.6 million or 45% in fiscal year 2021 compared to fiscal year 2020, primarily due to the revenue drivers noted above.

Blueberries

In the six months ended October 31, 2022, net sales in our Blueberries segment were $10.8 million and segment adjusted EBITDA was $0.8 million.

25

Liquidity and Capital Resources

Operating activities

Net cash provided by operating activities decreased $11.8 million for fiscal year 2022 compared to fiscal year 2021, reflecting our net loss in the current year compared to net income in the prior year, partially offset by improvements in working capital. Working capital was primarily impacted by favorable movement in accounts receivable, partially offset by unfavorable movement in inventory. Accounts receivable as of October 31, 2022 was lower compared to prior year, as a result of per-unit sales prices trending lower during the fourth quarter. Changes in inventory were primarily driven by the consolidation of Moruga and its respective inventory.

Net cash provided by operating activities decreased $31.9 million for fiscal year 2021 compared to fiscal year 2020, reflecting unfavorable net change in working capital. Within working capital, unfavorable changes in accounts receivable and inventory, were partially offset by favorable changes in grower payables. Accounts receivable increases were due to rising per-unit sales prices during the year. Changes in inventory were driven by a combination of higher farm related inventory in Peru, as well as higher per-unit cost of Mexican fruit on-hand compared to 2020. The increases in farm related inventory were due primarily to growth in productive acreage and higher on-hand quantities of fruit at the end of 2021 due to the extension of the harvest season combined with port delays. Favorable changes in grower payables were correlated with the pricing increases experienced with Mexican inventory.

Investing activities

Property, plant and equipment

In fiscal year 2022, capital expenditures were concentrated in the purchase of farmland in Peru as well as land improvements and orchard development of avocados in Guatemala and both avocados and blueberries in Peru. Proceeds from the sale of property, plant and equipment were primarily from land that had been originally intended for use as our corporate headquarters.

26

In fiscal year 2021, capital expenditures were primarily for the construction of the Laredo facility, which was completed in mid-fiscal 2021, and land improvements and orchard development in Peru and Guatemala. Proceeds from the sale of property, plant and equipment were primarily from the sale of multi-unit housing properties in California that had been used for housing seasonal avocado labor contractors. We also received insurance proceeds for property, plant and equipment damage sustained in our Dallas facility from a cold weather storm, which were subsequently invested in the rebuilding of the equipment.

Equity method investees

Capital contributions were made to our joint venture, Copaltas, in both fiscal years 2022 and 2021 to support the purchase of additional farmland in Colombia. We also made a capital contribution to Mr. Avocado in fiscal year 2022 to support the addition of a new distribution facility in southern China.

In fiscal year 2021, we issued $2.0 million in loans to Copaltas to support the working capital needs of the entity, which was repaid in fiscal year 2022. In addition, loan repayments from Moruga were $1.5 million during fiscal year 2021.

Financing activities

Borrowings and repayments of debt

We utilize a revolving line of credit for short-term working capital purposes. Principal payments on our term loans and other notes payable are made in accordance with debt maturity schedules. Our financing cash flow for fiscal year 2022 reflects the modification of principal amounts on our term-loans and increased borrowing capacity on our revolver (refer to the Capital Resources section below for more information).

During the year ended October 31, 2021, we repaid outstanding principal of $3.0 million on a note payable earlier than its scheduled maturity.

Shareholders’ equity

No dividends were paid in fiscal years 2022 and 2021. We paid dividends of $0.21 per share in fiscal year 2020.

Capital resources

(1)Includes cash and cash equivalents

27

Capital resources include cash flows from operations, cash and cash equivalents, and debt financing.

In October 2022, we entered into a third amendment to our syndicated credit facility with Bank of America (the “credit facility”) Merrill Lynch, originally dated October 2018, as amended in September 2020 and April 2022. Among other things, the third amendment changed the total borrowing capacity from $275 million to $250 million. The credit facility is comprised of two senior term loans totaling $100 million, compared to $175 million before the third amendment and a revolving credit agreement now providing up to $150 million in borrowings compared to $100 million before the third amendment. The loans are secured by real property, personal property and the capital stock of the Company’s subsidiaries. Borrowings under the credit facility bear interest at a spread over SOFR ranging from 1.5% to 2.5% depending on the Company’s consolidated total net leverage ratio, compared to a spread over LIBOR, ranging from 1.50% to 2.75%, prior to the third amendment.

As of October 31, 2022, we were required to comply with the following financial covenants: (a) a quarterly consolidated leverage ratio of not more than 3.5 to 1.00 and (b) a quarterly consolidated fixed charge coverage ratio of not less than 1.25 to 1.00. As of October 31, 2022, our consolidated leverage ratio was 2.17 to 1.00 and our consolidated fixed charge coverage ratio was 1.71 to 1.00 and we were in compliance with all such covenants of the credit facility. We pay fees on unused commitments on the credit facility.

Certain of our consolidated subsidiaries may also enter into short-term bank borrowings from time to time.

Material cash requirements

Capital expenditures

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 2023, we expect capital expenditures excluding the Moruga Blueberry Project (described below) to be lower than fiscal 2022. Cash paid for capital expenditures for the year ended October 31, 2022 was $61.2 million.

Moruga Blueberry Project

On May 1, 2022, the shareholders of Moruga approved a new capital project to farm approximately 1,500 additional acres of blueberries in the Olmos region of Peru. The project is anticipated to require a total investment of approximately $50 million, the majority of which will be funded by cash flow generated by Moruga and supplemented by pro-rata shareholder contributions based on each shareholders’ respective ownership interest. The project is expected to be carried out in phases, commencing in fiscal year 2023. For fiscal 2023, we expect capital expenditures related to the project to be approximately $20 to $25 million, depending on timing and other factors.

Leases

We are party to various leases for facilities, land, and equipment, for which our undiscounted cash liabilities were $105.3 million as of October 31, 2022. Of that amount, approximately $20 million was related to a 15-year lease of a distribution facility in the U.K. that began July 1, 2022. The facility is expected to expand our distribution reach within the growing U.K. market. Facility improvements began in the fourth quarter of fiscal 2022. In November 2022, subsequent to our fiscal 2022 year end, Moruga entered into a 25-year land lease agreement as part of the new project. Undiscounted lease payments associated with the lease agreement are approximately $60 million.

Long-term Debt

As of October 31, 2022, the aggregate principal amount outstanding on our term loans and notes was $141.0 million. See Note 7 to the consolidated financial statements for more information.

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 U.S. GAAP. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. 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 could differ from those estimates.

28

Business combinations. We account for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, which requires an allocation of the consideration paid, if any, to the identifiable assets, intangible assets and liabilities based on the estimated fair values as of the acquisition date. Goodwill represents the excess of the sum of the fair value of our previously held equity interest and the fair value of the noncontrolling interest, over the net of the acquisition-date values of the identifiable assets and liabilities assumed. Management estimates the fair value of assets and liabilities with the assistance of a third-party specialist, using a combination of the market and income valuation methods. These valuation methods use inputs that are estimated by management, such as revenue forecasts, projected capital spend and estimates for cost of sales. The Company may adjust the amounts recognized for a business combination within the allowable one-year measurement period after the acquisition date. Any such adjustments would generally be recorded as increases or decreases to the goodwill recognized in the transaction.

Goodwill. Our goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired. 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. We perform a qualitative assessment of goodwill for impairment on an annual basis during the fourth quarter of each year, and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If qualitative factors were to indicate that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value, we would then perform a quantitative assessment, which would consist primarily of a discounted cash flow (“DCF”) analysis and guideline publicly-traded companies (“GPC”) analysis to determine the fair value of the reporting unit. To the extent the carrying amount of the reporting unit exceeds its fair value, we recognize an impairment of goodwill for the excess up to the amount of goodwill of that reporting unit.

During the fourth quarter of fiscal 2022, we performed our annual goodwill impairment test on our Peruvian farming reporting unit within the International Farming segment and determined that the qualitative factors indicated that it was more-likely-than-not that the fair value of the reporting unit was less than its carrying value. As a result, with the assistance of a third-party specialist, we performed a quantitative assessment of the fair value of the reporting unit using the DCF and GPC methods described in Notes 3 and 4 to the consolidated financial statements, resulting in an impairment charge of $49.5 million. The significant assumptions used in determining the fair values of the reporting unit have been described in Note 4. To the extent that BEV to EBITDA multiples in the future decrease, the discount rate used in determining the present value of our cash flows increases, or if the Company does not meet its cash flow projections for the reporting unit, additional impairment charges may be recorded in the future.

Investments. We maintain investments in other fruit growers, packers and distributors. These investments are accounted for under the equity method of accounting when we have the ability to exercise significant influence, but not control, over the 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. We review our investments for other-than temporary-impairment (“OTTI”) on a quarterly basis, or earlier if indicators of impairment arise. If an impairment of an equity method investment is determined to be other than temporary, we would record OTTI sufficient to reduce the investment’s carrying value to its fair value, which results in a new cost basis in the investment. The primary factors we consider in our determination of whether declines in fair value are other-than-temporary are the length of time that the fair value of the investment is below our carrying value; the severity of the decline; and the financial condition, operating performance and near-term prospects of the investee. In addition, we consider the reason for the decline in fair value, be it general market conditions, industry specific or investee specific; and our intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. As our assessment of the fair value of our investments and any resulting impairment losses and the timing of when to recognize such charges requires judgment and includes estimates and assumptions, actual results could differ materially from our estimates and assumptions.

Income taxes. 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.

We recognize the 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.

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.

29

Recently Issued Accounting Standards

Refer to Note 2 to the consolidated financial statements included herein for information on recently issued accounting standards.

Off-Balance Sheet Arrangements

During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules, except as follows:

The Company may issue standby letters of credit through banking institutions. As of October 31, 2022, total letters of credit outstanding were $0.7 million.