Mission Produce, Inc. (AVO) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 Hass 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.
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
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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 the vast majority of fruit produced is sold to our Marketing and Distribution segment. The segment’s farming activities range from cultivating early-stage plantings to harvesting from mature trees. It also earns service revenues for packing and processing fruit for both our Blueberries segment, as well as for third-party producers of other crops. Operations are principally located in Peru, with smaller operations emerging in other areas of Latin America.
•Blueberries. The 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 blueberries produced are sold to a single distributor under an exclusive marketing agreement.
Recent business developments
In April 2023, the Marketing and Distribution segment opened a 102,000-square-foot state-of-the-art ripening, packing and forward distribution center in Dartford, United Kingdom. Strategically located with direct access to major international ports and transportation networks, the facility is expected to strengthen our international footprint and optimize product distribution to the Company’s customer base in the U.K.
Regulatory developments
In December 2021, the Organization for Economic Cooperation and Development (“OECD”), which is an international public policy setting organization comprised of member countries including the U.S., published a proposal for the establishment of a global minimum tax rate of 15% (the “Pillar Two rule”) . The OECD has recommended that the Pillar Two rule become effective for fiscal years beginning after January 1, 2024, which is our fiscal 2025. To date, member states are in various stages of implementation and the OECD continues to refine technical guidance. We are closely monitoring developments of the Pillar Two rule and are currently evaluating the potential impact in each of the countries we operate in.
Results of Operations
The operating results of our businesses are significantly impacted by the price and volume of fruit 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 our most significant subsidiaries is the U.S. dollar and the majority 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.
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| Years ended October 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||||||||
| (In millions, except percentages) | Dollar | % | Dollar | % | Dollar | % | ||||||||||||||
| Net sales | $ | 953.9 | 100.0 | % | $ | 1,045.9 | 100.0 | % | $ | 891.7 | 100.0 | % | ||||||||
| Cost of sales | 870.6 | 91.3 | % | 956.1 | 91.4 | % | 767.2 | 86.0 | % | |||||||||||
| Gross profit | 83.3 | 8.7 | % | 89.8 | 8.6 | % | 124.5 | 14.0 | % | |||||||||||
| Selling, general and administrative expenses | 76.4 | 8.0 | % | 77.5 | 7.4 | % | 63.6 | 7.1 | % | |||||||||||
| Goodwill impairment | — | — | % | 49.5 | 4.7 | % | — | — | % | |||||||||||
| Operating income (loss) | 6.9 | 0.7 | % | (37.2) | (3.6) | % | 60.9 | 6.8 | % | |||||||||||
| Interest expense | (11.6) | (1.2) | % | (5.5) | (0.5) | % | (3.7) | (0.4) | % | |||||||||||
| Equity method income | 4.0 | 0.4 | % | 5.1 | 0.5 | % | 7.5 | 0.8 | % | |||||||||||
| Remeasurement gain on acquisition of equity method investee | — | — | % | 2.0 | 0.2 | % | — | — | % | |||||||||||
| Other (expense) income, net | (0.2) | — | % | 4.4 | 0.4 | % | 1.3 | 0.1 | % | |||||||||||
| (Loss) income before income taxes | (0.9) | (0.1) | % | (31.2) | (3.0) | % | 66.0 | 7.4 | % | |||||||||||
| Provision for income taxes | 2.2 | 0.2 | % | 3.7 | 0.4 | % | 21.1 | 2.4 | % | |||||||||||
| Net (loss) income | (3.1) | (0.3) | % | (34.9) | (3.3) | % | 44.9 | 5.0 | % | |||||||||||
| Net loss attributable to noncontrolling interest | (0.3) | — | % | (0.3) | — | % | — | — | % | |||||||||||
| Net (loss) income attributable to Mission Produce | $ | (2.8) | (0.3) | % | $ | (34.6) | (3.3) | % | $ | 44.9 | 5.0 | % |
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.
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Net sales: | ||||||||||
| Marketing and Distribution | $ | 889.9 | $ | 1,016.1 | $ | 872.0 | ||||
| International Farming | 11.6 | 19.1 | 19.7 | |||||||
| Blueberries | 52.4 | 10.7 | — | |||||||
| Total net sales | $ | 953.9 | $ | 1,045.9 | $ | 891.7 |
Net sales decreased $92.0 million or 9% in fiscal year 2023 compared to the previous year, primarily due to a 24.0% decrease in average per-unit avocado sales prices, partially offset by increases in avocado volume sold of 12.0%. Price decreases and higher avocado volume sold were driven by higher industry supply out of Mexico in the current year as compared to limited supply out of Mexico in the previous year. Net sales were favorably affected by the full-year impact of consolidating revenue from our Blueberries segment.
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.
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.
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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. Fuel prices as well as variations in containerboard prices, which affect the cost of boxes and other packaging materials, impact 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.
| Years ended October 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||
| Gross profit (in millions) | $ | 83.3 | $ | 89.8 | $ | 124.5 | ||
| Gross profit as a percentage of net sales | 8.7 | % | 8.6 | % | 14.0 | % |
Gross profit decreased $6.5 million in fiscal year 2023 compared to the previous year to $83.3 million, and gross profit percentage increased by 10 basis points to 8.7% of revenue. The decrease in gross profit was concentrated in our International Farming segment and driven by lower pricing on avocados sold from Company-owned farms. Lower pricing conditions were driven by higher worldwide supply of avocados, driven by a stronger Mexican crop, combined with quality issues and a compressed Peruvian harvest season brought about by El Niño-related weather events. Gross profit percentage remained flat as higher volume of avocados sold and improved per-unit margin at lower average sales prices in our Marketing & Distribution segment and higher volume of blueberries sold by Blueberries segment largely offset the negative impact from our International Farming segment.
Gross profit decreased $34.7 million in fiscal year 2022 compared to the previous year 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.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses primarily include the costs associated with selling, professional fees, general corporate overhead and other related administrative functions.
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Selling, general and administrative expenses | $ | 76.4 | $ | 77.5 | $ | 63.6 |
SG&A expenses decreased $1.1 million or 1% in fiscal year 2023 compared to the previous year, primarily due to lower ERP and insurance costs. The reduction in ERP expense was concentrated in non-recurring process reengineering costs, while reduced insurance expense was attributed to lower rates on directors and officers liability coverage. These reductions were partially offset by an increase of approximately $2.4 million of expenses from the Blueberries segment, a large portion of which was attributed to amortization of an intangible asset recognized in the business combination.
SG&A increased $13.9 million or 22% in fiscal year 2022 compared to the previous year, 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.
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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 2023 or 2021. 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. We also incur interest expense on finance leases, computed using each leases’ explicit or implicit borrowing rate.
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Interest expense | $ | 11.6 | $ | 5.5 | $ | 3.7 |
Interest expense increased $6.1 million or 111% in fiscal year 2023 compared to the previous year, primarily due to the effect of rising interest rates on our credit facility, which is subject to variable rates, as well as higher average outstanding debt balances. Additionally, the Blueberries segment incurred interest expense of $2.2 million related to a long-term finance lease of land as well as short-term bank borrowings and financed payables.
Interest expense increased $1.8 million or 49% in fiscal year 2022 compared to the previous year, primarily due to higher interest rates, as the majority of our outstanding debt is subject to variable rates.
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.
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Equity method income | $ | 4.0 | $ | 5.1 | $ | 7.5 | ||||
| Remeasurement gain on acquisition of equity method investee | — | 2.0 | — |
Equity method income decreased $1.1 million or 22% in fiscal year 2023 compared to the previous year, primarily due to lower income from HAC, driven by inflationary pressure on SG&A expense.
Equity method income decreased $2.4 million or 32% in fiscal year 2022 compared to the previous year, primarily due to the effect of consolidation of Moruga, partially offset by stronger operating performance from HAC.
Other expense (income), net
Other expense (income), net consists of interest income, currency exchange gains or losses, interest rate derivative gains or losses and other miscellaneous income and expense items.
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Other expense (income), net | $ | 0.2 | $ | (4.4) | $ | (1.3) |
Other expense was $0.2 million in fiscal year 2023, compared to other income of $4.4 million in the previous year. Current year expense is primarily attributed to foreign currency transaction losses primarily due to the weakening of the U.S. dollar relative to the Mexican peso. In the prior year, gains were generated on interest rate swaps as a result of rising interest rates during the period.
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.
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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.
Our effective tax rate is impacted by income attributable to foreign jurisdictions which is taxed at different rates from the U.S. federal statutory tax rate of 21%, changes in foreign exchange rates taxable in foreign jurisdictions and nondeductible tax items.
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||
| Provision for income taxes (in millions) | $ | 2.2 | $ | 3.7 | $ | 21.1 | ||||
| Effective tax rate(1) | (256.6) | % | (12.0) | % | 32.0 | % |
(1) May not recalculate due to rounding.
The provision for income tax decreased $1.5 million or 41% in fiscal year 2023 compared to the previous year. The current year provision for income tax was impacted by a $1.7 million charge related to a statutory case in Mexico and $0.5 million in changes in unrecognized tax benefits. These charges were partially offset by a favorable change in ASC 740-30 (formerly APB 23) liability of $1.6 million.
The provision for income taxes decreased $17.4 million or 82% in fiscal year 2022 compared to the previous year. 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 in 2020 repealing tax benefits to agribusiness entities. The law subjects us to higher Peruvian corporate income tax rates than the rate in effect on the date of repeal of 15%, as follows: 20% for calendar years 2023 to 2024, 25% for calendar years 2025 to 2027, and 29.5% thereafter.
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 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
| Marketing & Distribution | International Farming | Blueberries | Total | Marketing & Distribution | International Farming | Blueberries(1) | Total | Marketing & Distribution | International Farming | Total | ||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended October 31, | ||||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||
| Third party sales | $ | 889.9 | $ | 11.6 | $ | 52.4 | $ | 953.9 | $ | 1,016.1 | $ | 19.1 | $ | 10.7 | $ | 1,045.9 | $ | 872.0 | $ | 19.7 | $ | 891.7 | ||||||||||||||||||||
| Affiliated sales | — | 78.6 | — | 78.6 | — | 95.6 | — | 95.6 | — | 84.9 | 84.9 | |||||||||||||||||||||||||||||||
| Total segment sales | $ | 889.9 | $ | 90.2 | $ | 52.4 | $ | 1,032.5 | $ | 1,016.1 | $ | 114.7 | $ | 10.7 | $ | 1,141.5 | $ | 872.0 | $ | 104.6 | $ | 976.6 | ||||||||||||||||||||
| Intercompany eliminations | — | (78.6) | — | (78.6) | — | (95.6) | — | (95.6) | — | (84.9) | (84.9) | |||||||||||||||||||||||||||||||
| Total net sales | $ | 889.9 | $ | 11.6 | $ | 52.4 | $ | 953.9 | $ | 1,016.1 | $ | 19.1 | $ | 10.7 | $ | 1,045.9 | $ | 872.0 | $ | 19.7 | $ | 891.7 |
(1) The Blueberries segment was consolidated prospectively from May 1, 2022.
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Adjusted EBITDA
| Years Ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Marketing & Distribution adjusted EBITDA | $ | 40.1 | $ | 23.5 | $ | 51.4 | ||||
| International Farming adjusted EBITDA | 3.1 | 23.3 | 33.9 | |||||||
| Blueberries adjusted EBITDA | 5.2 | 0.8 | — | |||||||
| Total reportable segment adjusted EBITDA | $ | 48.4 | $ | 47.6 | $ | 85.3 | ||||
| Net (loss) income | (3.1) | (34.9) | 44.9 | |||||||
| Interest expense | 11.6 | 5.5 | 3.7 | |||||||
| Provision for income taxes | 2.2 | 3.7 | 21.1 | |||||||
| Depreciation and amortization(1) | 32.8 | 24.8 | 20.4 | |||||||
| Equity method income | (4.0) | (5.1) | (7.5) | |||||||
| Stock-based compensation | 4.5 | 3.6 | 2.6 | |||||||
| Executive severance | 1.3 | — | — | |||||||
| Legal settlement | — | — | 0.8 | |||||||
| Asset impairment and disposals, net of insurance recoveries | 1.3 | 0.4 | (0.2) | |||||||
| Farming costs for nonproductive orchards | 1.8 | 1.5 | 0.8 | |||||||
| ERP costs(2) | 2.2 | 4.6 | — | |||||||
| Goodwill impairment | — | 49.5 | — | |||||||
| Remeasurement gain on business combination with Moruga | — | (2.0) | — | |||||||
| Transaction costs | 0.3 | 0.6 | — | |||||||
| Amortization of inventory adjustment recognized from business combination | 0.7 | 0.4 | — | |||||||
| Other expense (income), net | 0.2 | (4.4) | (1.3) | |||||||
| Noncontrolling interest(3) | (3.4) | (0.6) | — | |||||||
| Total adjusted EBITDA | $ | 48.4 | $ | 47.6 | $ | 85.3 |
(1) Includes depreciation and amortization of purchase accounting assets of $2.4 million, $1.4 million and $0.2 million for the years ended October 31, 2023, 2022, and 2021, respectively.
(2) Includes recognition of deferred implementation costs in the years ended October 31, 2023 and 2022. The year ended October 31, 2022 also includes 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 decreased $126.2 million or 12% in fiscal year 2023 compared to the previous year, driven by pricing and volume dynamics described above, which were driven by higher industry supply out of Mexico relative to last year.
Segment adjusted EBITDA increased $16.6 million or 71% in fiscal year 2023 compared to the previous year, due to higher gross margin from higher avocado volume sold and improved avocado per-unit margins.
Net sales in our Marketing and Distribution segment increased $144.1 million or 17% in fiscal year 2022 compared to the previous year, due to the same drivers impacting consolidated revenue.
Segment adjusted EBITDA decreased $27.9 million or 54% in fiscal year 2022 compared to the previous year, 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.
International Farming
The vast majority of fruit sales 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 September 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
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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 decreased $24.5 million or 21% in fiscal year 2023 compared to the previous year, primarily due to lower pricing on avocados sold from company-owned farms. Lower pricing conditions were driven by higher worldwide supply of avocados, driven by a stronger Mexican crop, combined with quality issues and a compressed Peruvian harvest season brought about by El Niño-related weather events.
Segment adjusted EBITDA decreased $20.2 million or 87% in fiscal year 2023 compared to the previous year, primarily due to lower gross profit resulting from lower pricing.
Total segment sales in our International Farming segment increased $10.1 million or 10% in fiscal year 2022 compared to the previous year, 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 the previous year, 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.
Blueberries
In fiscal year 2023, net sales in our Blueberries segment were $52.4 million and segment adjusted EBITDA was $5.2 million. The segment performance benefited from higher volumes associated with the consolidation of our Blueberries segment for the entirety of the fiscal year.
In the six months ended October 31, 2022, which was the period following consolidation, net sales were $10.7 million and segment adjusted EBITDA was $0.8 million.
Liquidity and Capital Resources
Operating activities
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Net (loss) income | $ | (3.1) | $ | (34.9) | $ | 44.9 | ||||
| Depreciation and amortization | 32.8 | 24.8 | 20.4 | |||||||
| Equity method income | (4.0) | (5.1) | (7.5) | |||||||
| Noncash lease expense | 5.9 | 5.3 | 4.3 | |||||||
| Stock-based compensation | 4.5 | 3.6 | 2.6 | |||||||
| Dividends received from equity method investees | 2.7 | 2.2 | 1.7 | |||||||
| Deferred income taxes | (6.4) | (0.6) | 8.8 | |||||||
| Goodwill impairment | — | 49.5 | — | |||||||
| Remeasurement gain on business combination with Moruga | — | (2.0) | — | |||||||
| Unrealized losses on foreign currency transactions | 1.4 | — | — | |||||||
| Unrealized gains on derivative financial instruments | (0.1) | (4.7) | (0.8) | |||||||
| Other | 1.7 | 0.9 | 0.3 | |||||||
| Change in working capital | (6.2) | (3.8) | (27.7) | |||||||
| Net cash provided by operating activities | $ | 29.2 | $ | 35.2 | $ | 47.0 |
Net cash provided by operating activities decreased $6.0 million for 2023 compared to the previous year. The change was driven by weaker operating performance within our International Farming segment and working capital growth. Within working capital, unfavorable changes in accounts receivable and accounts payable and accrued expenses were largely offset by favorable changes in inventory and other receivables. Trade accounts receivable were impacted by higher avocado sales prices as well as higher blueberry volumes and pricing, the former of which includes balances outstanding at our new U.K. entity which commenced operations this fiscal year. At our International Farming segment, the earlier completion of the avocado season compared to prior year correlated with unfavorable changes in accounts payable and accrued expenses and conversely, favorable changes in on-hand inventory of company owned fruit and reductions in other assets from accelerated VAT refunds.
Net cash provided by operating activities decreased $11.8 million for fiscal year 2022 compared to the previous year, reflecting our net loss in the current year compared to net income in the prior year, partially offset by improvements in working
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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.
Investing activities
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Purchases of property, plant and equipment | $ | (49.8) | $ | (61.2) | $ | (73.4) | ||||
| Proceeds from sale of property, plant and equipment | 0.2 | 3.0 | 2.4 | |||||||
| Insurance proceeds for the replacement of property, plant and equipment | — | — | 1.1 | |||||||
| Cash acquired in consolidation of Moruga | — | 4.3 | — | |||||||
| Investment in equity method investees | (2.1) | (0.4) | (0.2) | |||||||
| Purchase of other investment | (2.3) | — | — | |||||||
| Loans to equity method investees | — | — | (2.0) | |||||||
| Loan repayments from equity method investees | — | 3.0 | 1.5 | |||||||
| Other | (0.1) | (0.1) | 0.3 | |||||||
| Net cash used in investing activities | $ | (54.1) | $ | (51.4) | $ | (70.3) |
Property, plant and equipment
In fiscal year 2023, capital expenditures were concentrated in pre-production avocado orchard maintenance in Guatemala and Peru and construction costs on our new UK distribution facility. Capital expenditures in the Blueberries operation were $12.9 million, primarily related to irrigation installation and early-stage plant cultivation.
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. Capital expenditures in the Blueberries operation were $6.9 million, primarily related to early-stage plant cultivation.
Proceeds from the sale of property, plant and equipment were primarily from land that had been originally intended for use as our corporate headquarters.
Equity method investees
In all fiscal years presented, we made contributions to Copaltas and Mr. Avocado. Funds were used by Copaltas for the purchase of additional farmland in Colombia. Funds were used by Mr. Avocado to support working capital needs and an investment in a new distribution facility in southern China.
Loan repayments made in fiscal years 2022 and 2021 were from Copaltas and Moruga, respectively.
Other investment
In fiscal year 2023, we acquired a 5.1% equity interest in shares of common stock of a private entity that is developing avocado orchards in South Africa.
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Financing activities
| Years ended October 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Borrowings on revolving credit facility | $ | 145.0 | $ | 80.0 | $ | — | ||||
| Payments on revolving credit facility | (130.0) | (40.0) | — | |||||||
| Proceeds from short-term borrowings | 2.8 | 2.5 | — | |||||||
| Repayment of short-term borrowings | (2.5) | — | — | |||||||
| Principal payments on long-term debt obligations | (3.5) | (63.3) | (10.5) | |||||||
| Principal payments on finance lease obligations | (2.6) | (1.2) | (1.2) | |||||||
| Proceeds from loan from noncontrolling interest holder | 2.0 | — | — | |||||||
| Payments for long-term supplier financing | (0.1) | — | — | |||||||
| Purchase and retirement of common stock | (0.6) | — | — | |||||||
| Taxes paid related to shares withheld from the settlement of equity awards | (0.5) | — | — | |||||||
| Exercise of stock options | 0.1 | 0.1 | 0.2 | |||||||
| Repayment of stock option notes receivable | — | — | 0.1 | |||||||
| Payment of debt issuance, restructuring or extinguishment fees | — | (0.8) | (0.1) | |||||||
| Equity contributions from noncontrolling interest holders | 4.2 | 0.9 | — | |||||||
| Net cash provided by (used in) financing activities | $ | 14.3 | $ | (21.8) | $ | (11.5) |
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. The financing cash flow for fiscal 2022 reflects the modification of principal amounts on our term-loans and increased borrowing capacity on our revolver.
Blueberries
Financing at our Blueberries segment consists of shareholder contributions and loans, as well as short-term bank borrowings. In fiscal 2023, shareholder contributions were made to fund capital expenditures as described above in the Investing Activities section. Principal payments on finance lease obligations related to a long-term land lease in our Blueberries segment, which for accounting purposes has been classified as a finance lease.
Purchase and retirement of common stock
Shares of the company’s common stock may be repurchased from time to time in the open market or privately negotiated transactions under our share repurchase program. Refer to Note 13 to the consolidated financial statements for more information.
Capital resources
| October 31, | ||||||
|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | ||||
| Cash and cash equivalents | $ | 42.9 | $ | 52.8 | ||
| Working capital(1) | 122.6 | 126.4 |
(1)Includes cash and cash equivalents
Capital resources include cash flows from operations, cash and cash equivalents, and debt financing. Our Blueberries segment may also receive capital contributions or loans from noncontrolling shareholders.
Our syndicated credit facility with Bank of America has a total borrowing capacity of $250 million. The credit facility is comprised of two senior term loans totaling $100 million and a revolving credit agreement of $150 million. The loans are secured by assets of the Company, including certain real property, personal property and 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. We pay fees on unused commitments on the credit facility.
As of October 31, 2023, 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.
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As of October 31, 2023, our consolidated leverage ratio was 2.64 to 1.00 and our consolidated fixed charge coverage ratio was 1.58 to 1.00 and we were in compliance with all such covenants of the credit facility.
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 2024, we expect capital expenditures to be between $30 to $35 million.
Moruga Blueberry Project
In fiscal year 2023, Moruga commenced its previously announced project to farm approximately 1,500 additional acres of blueberries in the Olmos region of Peru. The project is funded by cash flow generated by Moruga and supplemented by pro-rata shareholder contributions based on each shareholders’ respective ownership interest. As of October 31, 2023, the estimated remaining capital expenditures related to the project were approximately $40 million, to be spent in phases through fiscal 2028, depending on timing and other factors.
Leases
We are party to various leases, the most material of which are for facilities and land. Our undiscounted cash liabilities were approximately $176.1 million as of October 31, 2023, of which, approximately $56.0 million was for a long-term land lease in our Blueberries segment.
Long-term debt
As of October 31, 2023, remaining maturities on our term loans and notes were $152.0 million. See Note 9 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.
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 may use either a qualitative or quantitative approach when testing a reporting unit’s 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 we use a qualitative approach and determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we would then perform the first step of the goodwill impairment test, 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.
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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.
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, 2023, total letters of credit outstanding were $0.7 million.