10-K: Calavo Growers Reports Strong Net Income Amidst Merger Plans

Calavo Growers, Inc. reported a significant increase in net income for fiscal year 2025, driven by Prepared segment growth and reduced legal expenses, while also announcing a definitive merger agreement with Mission Produce, Inc.

Summary

• Net income attributable to Calavo Growers, Inc. for fiscal year 2025 was $19.796 million, a substantial improvement from a net loss of $1.076 million in fiscal 2024.
• Net sales for fiscal year 2025 decreased by 2% to $648.434 million, compared to $661.544 million in fiscal 2024.
• The Fresh segment's net sales declined by 4% to $576.544 million, primarily due to lower avocado and tomato volumes.
• Avocado sales decreased by less than 1% to $530.707 million, with an 8% decrease in volume partially offset by a 9% increase in average selling price per carton.
• Tomato sales significantly decreased by 35% to $35.492 million, impacted by a smaller crop, suppressed markets, and anti-dumping duties following the termination of the 2019 Tomato Suspension Agreement.
• The Prepared segment's net sales increased by 12% to $71.890 million, driven by an 11% increase in pounds sold and a 1.5% increase in average selling price per pound.
• Gross profit decreased by 6% to $63.663 million, primarily due to $5.1 million in discrete costs from an FDA detention hold on avocado imports and pricing pressure in the Fresh segment.
• Selling, general and administrative expenses decreased by 16% to $42.1 million, mainly due to an $8.0 million reduction in professional and consulting fees, including lower FCPA investigation-related legal expenses.
• Operating income increased by 17.2% to $19.611 million in fiscal 2025.
• Cash and cash equivalents increased to $61.155 million as of October 31, 2025, from $57.031 million in the prior year.
• Working capital improved to $89.0 million at October 31, 2025, from $85.4 million at October 31, 2024.
• A definitive merger agreement was entered into with Mission Produce, Inc. on January 14, 2026, where Calavo shareholders will receive $27.00 per share, consisting of 0.9790 Mission shares and $14.85 in cash.
• The Fresh Cut Business was divested on August 15, 2024, for $83.0 million, with fiscal 2025 being the first full year reflecting its removal from continuing operations.
• The company paid quarterly dividends of $0.20 per share, totaling $14.3 million in fiscal 2025, and expects to continue comparable payments.
• A stock repurchase program of up to $25 million was authorized in March 2025, with no shares repurchased to date.

Sentiment

Score: 7

Explanation: The sentiment is positive due to a significant turnaround in net income, strong performance in the Prepared segment, and resolution of major compliance issues. The announced merger with Mission Produce also presents a strategic positive. However, ongoing Mexican tax disputes, declining Fresh segment sales, and underperforming stock price compared to peers temper the overall sentiment.

Positives

• Net income attributable to Calavo Growers, Inc. significantly improved to $19.796 million in fiscal 2025 from a net loss of $1.076 million in fiscal 2024.
• Net income from continuing operations increased by 191.6% to $19.970 million in fiscal 2025.
• The Prepared segment demonstrated strong growth, with net sales increasing by 12% and gross profit increasing by 38%, driven by higher volumes and improved operating efficiency.
• Selling, general and administrative expenses decreased by $8.0 million (16%), primarily due to reduced professional and consulting fees, including lower legal costs related to the FCPA investigation.
• Operating income increased by 17.2% to $19.611 million in fiscal 2025.
• Cash and cash equivalents increased to $61.155 million, and working capital improved to $89.0 million.
• The company has no outstanding amounts on its revolving credit facility or term loan as of October 31, 2025, with $36.0 million available for borrowing.
• The DOJ closed its FCPA inquiry on September 2, 2025, and the SEC concluded its investigation on December 22, 2025, without recommending enforcement action, resolving significant compliance matters.
• A Federal Court in Mexico formally recognized Calavo de Mexico (CDM) as a maquiladora in August 2025, strengthening the company's position in ongoing tax disputes.
• The company received a refund of $1.9 million USD in IVA taxes in Q2 2025, demonstrating progress in recovering these receivables.

Negatives

• Total net sales decreased by 2% in fiscal 2025, primarily due to declines in the Fresh segment.
• Fresh segment net sales decreased by 4%, driven by lower sales volumes in avocados and tomatoes.
• Avocado volume decreased by 8% in fiscal 2025, despite an increase in average selling price.
• Tomato sales experienced a significant 35% decrease, with a 30% decline in volume and a 7% decrease in average sales price, impacted by market conditions and anti-dumping duties.
• Gross profit decreased by 6%, largely due to $5.1 million in incremental costs from an FDA detention hold on avocado imports and pricing pressure in the Fresh segment.
• The company's stock performance significantly underperformed the Nasdaq Composite and its New Peer Group over the five-year period ending October 31, 2025.
• The 2013 Mexican Tax Assessment remains unresolved, with a total amount of $187.0 million USD as of October 31, 2025, and a provision of only $11.0 million recorded, indicating a significant potential liability.
• Mexican IVA receivables totaling $55.8 million remain uncollected, with ongoing delays and challenges from tax authorities.
• New tax audits for fiscal years 2019 and 2020 were initiated by Mexican tax authorities in Q3 2025, focusing on maquiladora classification.

Risks

• Ability to successfully execute operating and restructuring initiatives.
• Potential long-term effects of capital expenditure reductions.
• Adverse weather impacting supply and costs.
• Volatility in avocado and raw material prices (packaging, paper, fuel).
• Risks related to enhanced regulatory scrutiny or inspection protocols, including FDA detention holds, leading to shipment delays, incremental costs, or loss of product value.
• Supply chain disruptions.
• Risks from current or future acquisitions, including integration challenges.
• Data breaches or cybersecurity incidents, despite ongoing enhancement programs.
• Dependency on large customers (top ten customers accounted for 51% of net sales in 2025, largest customer 14%).
• Dependency on key personnel and challenges in managing leadership transitions.
• Labor availability and wage inflation.
• Reliance on co-packers for a portion of production needs.
• Product recalls or food safety issues, leading to liability claims or reputational damage.
• Environmental regulations and climate-related supply risk, including new climate-related disclosure requirements (California Senate Bills 253 and 261).
• Global trade complexities, including restrictions, tariffs, and currency movements.
• Exposure to unconsolidated entities and the volatility of the stock.
• Resolution of pending matters with the Mexican Tax Administration Service (SAT) and the risk of unfavorable legal or administrative outcomes, including the $187.0 million USD 2013 Tax Assessment and $55.8 million IVA receivables.
• Risks related to regulatory actions affecting imported produce, such as renewed FDA inspection protocols and detention holds related to pesticide residues.
• Significant seasonal, short-term, or unexpected fluctuations in avocado prices or crop yields.
• Risks related to the ability to effect the transactions contemplated by the Merger Agreement with Mission Produce, Inc. and the anticipated benefits of the merger.
• If the merger is not completed, potential negative reactions from financial markets, impact on stock price, inability to secure financing, and potential termination fees ($12.87 million or $15.02 million).
• Challenges in combining Calavo and Mission, including integration difficulties, loss of key employees, and disruption of ongoing businesses.
• A portion of the workforce is unionized, and labor disruptions could decrease profitability.
• Increasing competition in fresh produce and prepared food markets, including from foreign-grown avocados.
• Changing consumer preferences for food products.
• Reliance on independent certifications (organic, Non-GMO, kosher) which could be lost.
• Unanticipated changes in U.S. or international tax provisions, new tax legislation, or exposure to additional tax liabilities.
• Increased organized crime in Mexico affecting avocado farming, packing, and shipment activities.
• Unfavorable international events or regulations, including trade protection measures and changes in foreign investment laws.
• Geopolitical conflicts and related economic conditions.
• Currency exchange fluctuations between Mexican peso and U.S. dollar.
• Limited ability to raise capital in the future.
• Restrictive debt covenants and other requirements related to the credit facility.
• Risks associated with investments in unconsolidated entities (e.g., Don Memo), including potential uncollectible advances.
• Market volatility and fluctuations in common stock price.
• Uncertainty regarding future dividend levels.
• Impact of general economic conditions or an economic downturn on consumer spending and profitability.
• Insurance policies may not adequately protect from liability or may become commercially unavailable.

Future Outlook

The company anticipates avocado sales volume to increase in fiscal 2026 due to new customer recruitment, growth from existing customers, and expanded global sourcing. It expects to continue paying comparable cash dividends in the future. The merger with Mission Produce, Inc. is subject to shareholder and regulatory approvals, with no assurances of successful consummation or realization of anticipated benefits. The company is actively implementing a multi-year cybersecurity enhancement program and continues to monitor and evaluate enacted and proposed legislation related to global minimum tax rules (Pillar Two Model Rules).

Management Comments

• "We believe that favorable consumption trends for our products persist, supported by broader consumer shifts toward health and wellness."
• "We believe that demographic changes in the U.S. will continue to support growth in avocado and avocado-based product consumption."
• "We anticipate avocado products will further penetrate the United States marketplace, driven by year-round availability of imported fresh avocados, a growing Hispanic population, and the promotion of the health benefits of avocados."
• "As one of the largest marketers of avocado products in the United States, we believe that we are well positioned to leverage this trend and to grow our avocado and guacamole products business."
• "We believe that our diversified sourcing capabilities, value added infrastructure, and customer relationships provide a foundation that supports our ability to navigate these factors over time."
• "We remain focused on expanding grower partnerships and strengthening relationships with retail and foodservice customers to support long-term net sales growth across both segments."
• "We believe this ruling strengthens our position in the Nullity Trial and supports our arguments with respect to the 2013 Assessment."
• "While we continue to believe that the tax assessment for fiscal year 2013 is completely without merit, and that we will prevail on the Nullity Trial in the Federal Tax Court, we also believe that it is in the best interest of CDM and the Company to settle the 2013 Assessment as quickly as possible."
• "We believe that our operations in Mexico are properly documented, and our internationally recognized tax advisors believe that there are legal grounds to prevail in collecting the corresponding IVA amounts."
• "We believe that the annual capacity of this facility will be sufficient to handle its forecasted annual production needs." (referring to various facilities)

Industry Context

The perishable food industry, particularly avocados, is highly competitive with increasing volumes of foreign-grown avocados entering the U.S. market. Consumer preferences are shifting towards health and wellness and nutrient-dense foods, benefiting avocado and avocado-based product consumption. The growing Hispanic population in the U.S. is a key demographic driver for avocado demand. Regulatory oversight, especially at borders, and evolving climate-related disclosure requirements are increasing complexities for the industry. The termination of the 2019 Tomato Suspension Agreement and resulting anti-dumping duties highlight trade policy impacts on specific produce markets.

Comparison to Industry Standards

• The company's stock performance significantly underperformed the Nasdaq Composite and its New Peer Group (including John B Sanfilippo & Son, Inc., Mission Produce, Inc., Bridgford Foods Corporation, Utz Brands, Inc., The Vita Coco Company, Inc., MGP Ingredients, Inc., The Duckhorn Portfolio, Inc., Westrock Coffee Company, LLC, BRC, Inc., Tootsie Roll Industries, Inc., Vital Farms, Inc., SunOpta, Inc., and Limoneira Company) over the five-year period from October 31, 2020, to October 31, 2025. Calavo's cumulative total return was 37.04, compared to Nasdaq Composite's 225.69 and the New Peer Group's 89.97 (assuming $100 invested).
• Per-capita avocado consumption in the United States was approximately nine pounds in 2023-2024 and is estimated to have remained at a similar level in 2024-2025, representing a 64% increase over the past decade, indicating strong underlying market growth for the company's core product.
• The company believes its scale, infrastructure, and reputation for quality and service differentiate it from smaller competitors in the avocado, tomato, and produce markets, where barriers to entry are relatively low.
• The company's use of ultra-high-pressure processing technology for preservative-free guacamole positions it as a leader in the prepared avocado products segment, addressing consumer preferences for natural products.

Management Changes

Corporate Governance

Legal Proceedings

• The 2013 Mexican Tax Assessment by the SAT, totaling $187.0 million USD as of October 31, 2025, remains unresolved, with ongoing Nullity Trial litigation. A provision of $11.0 million has been recorded.
• Dispute with Mexican tax authorities regarding $55.8 million in IVA receivables, with ongoing administrative appeals and legal actions to recover these amounts.
• Income tax audits initiated by Mexican tax authorities for fiscal years 2019 and 2020, focusing on the maquiladora classification of Calavo de Mexico (CDM).
• Voluntary disclosure of potential Foreign Corrupt Practices Act (FCPA) issues in Mexico to the SEC and DOJ. The DOJ closed its inquiry on September 2, 2025, and the SEC concluded its investigation on December 22, 2025, without recommending enforcement action.

Related Party Transactions

• Procured $5.4 million of avocados from entities owned or controlled by Board members in fiscal 2025, with $0.5 million in outstanding payables as of October 31, 2025.
• Procured $8.2 million of avocados from entities affiliated with the former Chief Executive Officer in fiscal 2025, with less than $0.1 million in outstanding payables as of October 31, 2025.
• Outstanding advances of $7.9 million to Agricola Don Memo, S.A. de C.V. (50% owned unconsolidated entity) as of October 31, 2025, for operating purposes and marketing program.
• Outstanding advances of $5.2 million to Agricola Belher (third-party grower) as of October 31, 2025, for operating purposes and marketing program.
• An infrastructure loan agreement with Don Memo for $1.6 million outstanding as of October 31, 2025, accruing interest at 7.25%.
• A bridge loan of $0.5 million outstanding to Belher as of October 31, 2025, accruing interest at 10%.

Stakeholder Impact

• **Shareholders**: Potential for significant value creation through the proposed merger with Mission Produce, Inc., offering a mix of cash and stock. Continued quarterly dividends of $0.20 per share. Stock repurchase program authorized, potentially supporting share price. However, historical stock underperformance and ongoing Mexican tax liabilities pose risks.
• **Employees**: Leadership transition with a new CEO and CFO. Ongoing commitment to employee well-being, competitive compensation, and development opportunities. Union representation for a substantial portion of Mexican employees. Cybersecurity enhancement program aims to protect internal operations.
• **Customers**: Continued focus on high-quality products, year-round availability through diverse sourcing, and value-added services (ripening, packaging). Expansion of sales to existing and new customers in the Prepared segment. Potential for broader product offerings and distribution network post-merger.
• **Suppliers/Growers**: Dependence on long-term relationships with independent growers in California and Mexico. Ongoing advances to key growers (Don Memo, Belher). Risks from adverse weather, price volatility, and regulatory changes affecting supply and costs. Potential for increased avocado sales volume in fiscal 2026 could benefit growers.
• **Creditors**: No amounts outstanding on the revolving credit facility or term loan as of October 31, 2025, indicating a healthy debt position. Compliance with financial covenants under the Credit Agreement. However, unresolved Mexican tax assessments could pose a future financial risk if an adverse outcome occurs.

Next Steps

• Shareholder and regulatory approvals for the merger with Mission Produce, Inc.
• Integration planning for the combined Calavo and Mission Produce business post-merger.
• Continued pursuit of collection for $55.8 million in Mexican IVA receivables through administrative processes and potential legal actions.
• Responding to information requests for the fiscal years 2019 and 2020 Mexican tax audits.
• Implementation of a multi-year cybersecurity enhancement program to address identified improvement opportunities.
• Monitoring and evaluating enacted and proposed legislation related to the Pillar Two Model Rules for global minimum tax.
• Timing and volume of repurchases under the authorized $25 million stock repurchase program will depend on market conditions and capital allocation priorities.
• Continued focus on expanding grower partnerships and strengthening relationships with retail and foodservice customers to support long-term net sales growth.

Key Dates

Recommendation

The filing presents a mixed bag of strong financial improvements in net income and the Prepared segment, coupled with the strategic announcement of a merger with Mission Produce, Inc. These factors suggest potential for future growth and shareholder value. However, the decline in Fresh segment sales, significant unresolved Mexican tax liabilities, and historical stock underperformance against peers introduce considerable uncertainty and risk. The merger, while potentially transformative, is subject to approvals and integration risks. Given these balancing factors, a 'hold' recommendation is appropriate, advising investors to monitor the merger's progress, the resolution of tax disputes, and the performance of the Fresh segment before making further investment decisions.

Keywords

Avocado, Fresh Produce, Guacamole, Prepared Foods, SEC Filing, 10-K, Merger, Mission Produce, Financial Results, Fiscal 2025, Food Distribution, Agricultural, Supply Chain, Mexico Operations, Tax Disputes, Corporate Governance, Risk Management, Dividend, Stock Repurchase