MISSION PRODUCE, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this quarterly report. This discussion and analysis contains forward-looking statements based upon our current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. Please refer to the section of this report under the heading "Forward Looking Statements."
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 to our customers and provide value-added services including ripening, bagging, custom packing and logistical management. In addition, we provide our customers with merchandising and promotional support, insights on market trends and training designed to increase their retail avocado sales. We have two operating segments, which are also reporting segments. These reporting segments are Marketing and Distribution and International Farming. Our Marketing and Distribution reporting segment sources fruit from growers and then distributes the fruit through our global distribution network. Our International Farming segment owns and operates orchards from which substantially all fruit produced is sold to our Marketing and Distribution segment. The International Farming segment's farming activities range from cultivating early-stage plantings to harvesting from mature trees, and it also earns service revenues for packing and processing for producers of other crops during the avocado off-harvest season. The International Farming segment is principally located inPeru , with smaller operations emerging in other areas ofLatin America .
ERP system implementation
OnNovember 1, 2021 , we implemented a new enterprise resource planning ("ERP") system in our Marketing and Distribution segment to improve operational visibility and financial reporting capabilities. During implementation, we encountered significant challenges which limited our ability to effectively manage our business operations, thereby impacting our profitability and financial results for the first quarter of 2022. Our distribution centers and packing houses experienced problems with purchasing, receiving and shipping, which resulted in a high reliance on both third-party fruit and packaged fruit that we would have otherwise sourced directly in the field and packed in our facilities. Other issues included delays in automated customer invoicing, inventory management issues.
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 theU.S. dollar. The functional currency of substantially all of our subsidiaries is theU.S. dollar and substantially all of our sales are denominated inU.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 theU.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. 15
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Three Months Ended
January 31,
2022 2021
(In millions, except for percentages) Dollars % Dollars %
Net sales $ 216.6 100 % $ 173.2 100 %
Cost of sales 216.1 100 % 150.5 87 %
Gross profit 0.5 - % 22.7 13 %
Selling, general and administrative expenses 18.7 9 % 14.6 8 %
Operating (loss) income (18.2) (8) % 8.1 5 %
Interest expense (0.9) - % (0.9) (1) %
Equity method income 1.6 1 % 2.3 1 %
Other income 1.6 1 % - - %
(Loss) income before income taxes (15.9) (7) % 9.5 5 %
(Benefit) provision for income taxes (2.5) (1) % 7.3 4 %
Net (loss) income $ (13.4) (6) % $ 2.2 1 %
Net sales
Our net sales are generated predominantly from the shipment of fresh avocados to
retail, wholesale and foodservice customers worldwide. Our net sales are
affected by numerous factors, including the balance between the supply of and
demand for our produce and competition from other fresh produce companies. Our
net sales are also dependent on our ability to supply a consistent volume and
quality of fresh produce to the markets we serve.
Three Months Ended
January 31,
(In millions) 2022 2021
Net sales:
Marketing and Distribution $ 212.3 $ 169.6
International Farming 4.3 3.6
Total net sales $ 216.6 $ 173.2
Net sales increased $43.4 million or 25% in the three months ended January 31,
2022 compared to the same period last year. Growth was driven by a 50% increase
in average per-unit avocado sales prices due to lower industry supply out of
Mexico , as well as inflationary pressures. Partially offsetting price gains was
an 18% decrease in avocado volume sold, which was primarily driven by lower
supply and exacerbated by price sensitivity in select international markets that
competed for lower cost sources of fruit.
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 andCentral America to demand markets inNorth America ,Europe andAsia . 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. 16
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Three Months Ended
January 31,
2022 2021
Gross profit (in millions) $ 0.5 $ 22.7
Gross profit as a percentage of sales 0.2 % 13.1 %
Gross profit decreased 98%, in the three months ended January 31, 2022 compared
to the same period last year, to $0.5 million , primarily due to temporary and
unforeseen operational challenges created by the ERP implementation in our
Marketing & Distribution segment. The challenges limited our ability to
effectively manage our supply chain during the first quarter of 2022. Inventory
management problems and unusually large fruit disposals-coupled with the low
industry volume-resulted in a high reliance on both third-party fruit and
packaged fruit, which have higher price points relative to fruit we source
directly in the field, or pack in our facilities. This unfavorable sourcing mix
combined with inflationary pressures, most notably in transportation costs, and
weaker fixed cost absorption due to lower volume resulted in a significant
increase in per-box costs, eroding gross profit.
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.
Three Months Ended
January 31,
(In millions) 2022 2021
Selling, general and administrative expenses Selling, general and administrative expenses increased$4.1 million or 28% in the three months endedJanuary 31, 2022 compared to the same period last year due primarily to noncapitalizable costs associated with the implementation of our new ERP system in our Marketing and Distribution segment, as well as higher professional fees, travel expenses, and certain transaction costs incurred in the first quarter of 2022. Higher professional fees were primarily related to our change inSEC filer status from an emerging growth company to a large accelerated filer onOctober 31, 2021 .
Interest expense
Interest expense consists primarily of interest on borrowings under working capital facilities that we maintain and interest on other long-term debt used to make capital and equity investments.
Three Months Ended
January 31,
(In millions) 2022 2021
Interest expense $ 0.9 $ 0.9
Interest expense was relatively flat in the three months ended January 31, 2022
compared to the same period last year. Lower average debt balances were offset
by moderately higher interest rates compared to the same period last year.
Equity method income
Our material equity method investees include Henry Avocado ("HAC"), Mr. Avocado,
Moruga, and Copaltas.
Three Months Ended
January 31,
(In millions) 2022 2021
Equity method income $ 1.6 $ 2.3
Equity method income decreased $0.7 million or 30% in the three months ended
January 31, 2022 compared to the same period last year due to lower earnings
from Moruga. Earnings at Moruga were affected by lower per-unit sales pricing,
as well as higher farming costs associated with the replacement of certain
farmable area with the intent of increasing yields.
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Other income
Other income consists of interest income, currency exchange gains or losses,
interest rate derivative gains or losses and other miscellaneous income and
expense items.
Three Months Ended
January 31,
(In millions) 2022 2021
Other income $ 1.6 $ -
Other income increased $1.6 million in the three months ended January 31, 2022
compared to the same period last year primarily due to gains on our interest
rate swaps driven by market movements in short-term interest rates and gain on
foreign currency transactions primarily between the U.S. dollar and Mexican peso
compared to losses in the prior year.
(Benefit) provision for income taxes
The (benefit) 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.
Three Months Ended
January 31,
2022 2021
(Benefit) provision for income taxes (in millions) $ (2.5) $ 7.3
Effective tax rate 15.7 % 76.8 %
We had an income tax benefit of $2.5 million in the three months ended January
31, 2022 compared to a provision for income taxes of $7.3 million for the same
period last year. The benefit from income taxes for the three months ended
January 31, 2022 was attributed to pre-tax losses recorded during the period.
The provision for income taxes for the three months ended January 31, 2021
included a discrete tax expense of $5.1 million , related to the remeasurement of
our deferred tax liabilities in Peru due to the enactment of tax rate changes
for future years. Notwithstanding the impact of this prior year discrete charge,
the decrease in our effective tax rate was attributable to a greater percentage
of our income being concentrated in foreign jurisdictions with lower corporate
tax rates than the U.S. 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),
noncapitalizable ERP implementation costs, transaction costs, and any special,
non-recurring, or one-time items such as impairments that are excluded from the
results the CEO reviews uses to assess segment performance and results.
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Net sales
Marketing and International Marketing and International
Distribution Farming Total Distribution Farming Total
Three Months Ended
January 31,
2022 2021
Third party sales $ 212.3 $ 4.3 $ 216.6 $ 169.6 $ 3.6 $ 173.2
Affiliated sales - (1.0) (1.0) - 0.2 0.2
Total segment sales 212.3 3.3 215.6 169.6 3.8 173.4
Intercompany eliminations - 1.0 1.0 - (0.2) (0.2)
Total net sales $ 212.3 $ 4.3 $ 216.6 $ 169.6 $ 3.6 $ 173.2
Adjusted EBITDA
Three Months Ended
January 31,
(In millions) 2022 2021
Marketing and Distribution adjusted EBITDA $ (7.7) $ 13.7
International Farming adjusted EBITDA (2.7) (1.2)
Total reportable segment adjusted EBITDA (10.4) 12.5
Net (loss) income (13.4) 2.2
Interest expense 0.9 0.9
(Benefit) provision for income taxes (2.5) 7.3
Depreciation and amortization 4.5 3.6
Equity method income (1.6) (2.3)
Stock-based compensation 0.8 0.8
Asset impairment and disposals, net of insurance recoveries 0.1 -
Farming costs for nonproductive orchards 0.5 -
Noncapitalizable ERP implementation costs 1.5 -
Transaction costs 0.4 -
Other income (1.6) -
Total adjusted EBITDA (10.4) 12.5
Marketing and Distribution
Net sales in our Marketing and Distribution segment increased$42.7 million or 25% in the three months endedJanuary 31, 2022 compared to the same period last year, due to the same drivers impacting consolidated revenue. Segment adjusted EBITDA was$(7.7) million in the three months endedJanuary 31, 2022 compared to$13.7 million in the same period last year. The decrease was due to a combination of lower gross margin and higher selling, general and administrative expenses 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. Affiliated sales are concentrated in the second half of the fiscal year in alignment with the Peruvian avocado harvest season, which typically runs from April through August of each year. As a result, adjusted EBITDA for International Farming is generally concentrated in the third and fourth quarters of the fiscal year in alignment with sales.
Net sales in our International Farming segment increased
Segment adjusted EBITDA decreased$1.5 million or 125% in the three months endedJanuary 31, 2022 to$(2.7) million , primarily due to higher costs associated with strategic initiatives in farming maintenance and operations that are intended to drive yield enhancements. 19
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Liquidity and Capital Resources
Operating activities
Operating cash flows are seasonal in nature. We typically see increases in working capital during the first half of our fiscal year as our supply is predominantly sourced fromMexico under payment terms that are shorter than terms established for other source markets. In addition, we are building our growing crops inventory in our International Farming segment during the first half of the year for ultimate harvest and sale that will occur during the second half of the fiscal year. While these increases in working capital can cause operating cash flows to be unfavorable in individual quarters, it is not indicative of operating cash performance that we expect to realize for the full year. Three Months Ended January 31, (In millions) 2022 2021 Net (loss) income$ (13.4) $ 2.2 Depreciation and amortization 4.5 3.6 Noncash lease expense 1.2 0.9 (1) Equity method income (1.6) (2.3) Stock-based compensation 0.8 0.8 Dividends received from equity method investees 2.2 - Losses (gains) on asset impairment, disposals and sales, net of insurance recoveries 0.1 (0.2) Deferred income taxes - 4.9 Other (0.7) 0.1 Changes in working capital (34.5) (19.7) (1) Net cash used in operating activities$ (41.4)
(1)Prior period amounts differ from those previously reported due to the
adoption of ASC 842, Leases, effective
Net cash used in operating activities was higher by$31.7 million for the three months endedJanuary 31, 2022 compared to the respective period last year, reflecting our net loss in the first quarter of 2022 and unfavorable net change in working capital. Within working capital, unfavorable changes in inventory and accounts receivable were partially offset by favorable changes in grower payables. Changes in inventory were driven by higher per-unit cost of Mexican fruit on-hand and the build-up of growing crop inventory inPeru , compared to prior year. The growing crop increases were due to higher per-acre farming costs and an increase in productive acreage. Changes in accounts receivable and grower payables were correlated with the pricing factors noted above. Additionally, increases in accounts receivable were due to delayed customer payments related to ERP challenges. Investing activities Three Months Ended January 31, (In millions) 2022 2021 Purchases of property and equipment$ (20.9) $
(22.4)
Proceeds from sale of property, plant and equipment -
2.2
Investment in equity method investees -
(0.2)
Loan repayments from equity method investees 1.0
-
Other (0.2)
(0.2)
Net cash used in investing activities$ (20.1) $ (20.6) Property, plant and equipment
In the three months ended
In the three months endedJanuary 31, 2021 , capital expenditures were concentrated in the construction of our new distribution and ripening facility inLaredo, Texas , which opened inMay 2021 , and land improvements and orchard development inPeru andGuatemala . Proceeds from the sale of property, plant and equipment were primarily from the sale of two multi-unit housing properties inCalifornia that had been used for housing seasonal avocado labor contractors. 20
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Equity method investees
In the three months ended
Financing activities
Three Months Ended
January 31 ,
(In millions) 2022 2021
Principal payments on long-term borrowings$ (2.2) $
(2.2)
Principal payments on finance lease obligations (0.3)
(0.3)
Net cash used in financing activities$ (2.5) $
(2.5)
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.
Capital resources (In millions) January 31, 2022 October 31, 2021 Cash and cash equivalents $ 25.3 $ 84.5 Working capital(1) 130.6 157.9
(1)Includes cash and cash equivalents
Capital resources include cash flows from operations, cash and cash equivalents, and debt financing.
We have a syndicated credit facility withBank of America, N.A ., comprised of two term loans and a revolving credit facility ("revolver") that provides up to$100 million in borrowings that will expire inOctober 2023 . The credit facility also includes a swing line facility and an accordion feature which allows us to increase the borrowings by up to$125 million , with bank approval. We did not have any outstanding borrowings under the revolver as ofJanuary 31, 2022 andOctober 31, 2021 . Interest on the revolver bears rates at a spread over LIBOR that varies with our leverage ratio. As ofJanuary 31, 2022 andOctober 31, 2021 , interest rates on the revolver were 1.86% and 1.84%, respectively. As ofJanuary 31, 2022 , we were required to comply with the following financial covenants: (a) a quarterly consolidated leverage ratio of not more than 2.75 to 1.00 and (b) a quarterly consolidated fixed charge coverage ratio of not less than 1.50 to 1.00. As ofJanuary 31, 2022 , our consolidated leverage ratio was 2.47 to 1.00 and our consolidated fixed charge coverage ratio was 1.73 to 1.00 and we were in compliance with all such covenants of the credit facility. The loans are secured by real property, personal property and the capital stock of our subsidiaries. We pay fees on unused commitments on the credit facility.
Material cash requirements
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 2022, we do not expect a material deviation from amounts spent in recent fiscal years. Cash paid for capital expenditures for the years endedOctober 31, 2021 and 2020, were$73.4 million and$67.3 million , respectively.
Operating leases
We are party to various operating leases for facilities, land, and equipment, for which our undiscounted cash liabilities were$73.6 million as ofJanuary 31, 2022 . Long-term Debt As ofJanuary 31, 2022 , remaining maturities on our term loans and notes were$162.0 million . See Note 4 to the consolidated financial statements for more information. 21
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