10-Q: Calavo Growers Swings to Profit, Prepared Segment Soars

Calavo Growers reported a significant swing to net income for Q3 and the nine months ended July 31, 2025, driven by strong performance in its Prepared segment despite Fresh segment headwinds.

Summary

• Net income attributable to Calavo Growers, Inc. was $4.7 million ($0.26 per share) for the three months ended July 31, 2025, a significant improvement from a net loss of $0.7 million ($0.04 loss per share) in the prior year.
• For the nine months, net income was $16.0 million ($0.90 per share), compared to a net loss of $0.9 million ($0.05 loss per share) in the previous year.
• Total net sales for the three months were $178.8 million, flat year-over-year, while nine-month net sales increased 7% to $523.8 million.
• The Prepared segment saw a 40% increase in net sales for the quarter and 10% for the nine months, driven by higher volumes and improved pricing.
• Fresh segment net sales decreased 5% for the quarter due to lower avocado and tomato volumes, but increased 6% for the nine months due to higher avocado pricing.
• Gross profit for the quarter decreased 9% to $18.2 million, primarily due to $4.2 million in discrete costs from an FDA detention hold on avocados.
• Gross profit for the nine months increased 1% to $52.0 million, with strong Prepared segment growth offsetting Fresh segment declines.
• The U.S. Department of Justice closed its Foreign Corrupt Practices Act (FCPA) inquiry related to Mexico operations.
• A Mexican court ruled in favor of Calavo de México (CDM) recognizing its maquila status and directing a refund of IVA balances for January-June 2013, though the SAT has appealed this decision.

Sentiment

Score: 7

Explanation: The company demonstrated a strong turnaround in net income and robust growth in its Prepared segment, alongside positive resolutions to the FCPA inquiry and a favorable tax ruling. However, the Fresh segment faced significant headwinds from regulatory issues and trade policy changes, and the large 2013 Mexican tax assessment remains an unresolved, material contingent liability, tempering overall sentiment.

Positives

• Achieved a significant swing to net income for both the three and nine months ended July 31, 2025, from a net loss in the prior year.
• Prepared segment net sales increased 40% for the quarter and 10% for the nine months, driven by a 35% increase in pounds sold for the quarter.
• Prepared segment gross profit surged 201% for the quarter and 27% for the nine months, reflecting improved operational efficiency and lower fruit input costs.
• The U.S. Department of Justice officially closed its Foreign Corrupt Practices Act (FCPA) inquiry related to Mexico operations.
• A Mexican court issued a favorable ruling recognizing Calavo de México (CDM) as a maquila and directing the SAT to refund IVA balances for January-June 2013, strengthening the company's position on tax matters.
• The SAT refunded 36.7 million Mexican pesos (approximately $1.9 million USD) in VAT relating to claims for March, April, and November 2019.
• Cash provided by operating activities increased 41% to $19.2 million for the nine months ended July 31, 2025.
• Working capital improved to $89.9 million at July 31, 2025, from $85.4 million at October 31, 2024.
• The Board of Directors authorized a stock repurchase program of up to $25 million in March 2025.

Negatives

• Fresh segment net sales decreased 5% for the three months ended July 31, 2025, primarily due to lower avocado and tomato sales volumes.
• Avocado sales volume declined 5% for the quarter and 9% for the nine months.
• Tomato sales decreased 40% for the quarter and 37% for the nine months, primarily due to volume declines and lower average selling prices.
• Gross profit for the three months decreased 9% to $18.2 million, primarily due to $4.2 million in discrete costs associated with an FDA detention hold on certain avocado imports.
• The U.S. Department of Commerce terminated the U.S.-Mexico Tomato Suspension Agreement on July 14, 2025, imposing a 17% anti-dumping duty on Mexican tomatoes, impacting tomato sales and pricing.
• The Mexican Tax Administration Service (SAT) appealed the favorable court ruling regarding CDM's maquila status and IVA refunds to the Mexican Supreme Court.
• The 2013 tax assessment in Mexico remains a significant contingent liability, totaling approximately $160 million USD plus $6.3 million USD for employee profit-sharing liability.
• Foreign currency remeasurement losses were $2.5 million for the three months and $2.5 million for the nine months ended July 31, 2025.

Risks

• Adverse weather impacting supply and costs.
• Seasonal fluctuations in raw material volume and quality.
• Volatility in avocado and raw material prices (packaging, paper, fuel).
• Risks related to enhanced regulatory scrutiny or inspection protocols, including detention holds by the U.S. Food and Drug Administration (FDA), which can cause shipment delays, incremental costs, or loss of product value.
• Supply chain disruptions, including potential severe outbreaks of avocado weevil, which could reduce avocado supply and increase procurement costs.
• Data breaches or cybersecurity incidents.
• Dependency on large customers and key personnel.
• Labor availability and wage inflation.
• Co-packer reliance and competitive pressures.
• Product recalls or food safety issues.
• Shifting consumer preferences and sustainability trends.
• Environmental regulations and climate-related supply risk.
• Global trade complexities, including restrictions, tariffs (e.g., 17% anti-dumping duty on Mexican tomatoes), and currency movements.
• Exposure to unconsolidated entities.
• Volatility of the company's stock.
• The resolution of pending matters with the SAT and the risk of unfavorable legal or administrative outcomes, including the 2013 tax assessment of approximately $160 million USD.
• Uncertainty surrounding U.S. trade policy, particularly with Mexico, could lead to new or increased trade barriers and higher input costs.

Future Outlook

The company anticipates inflationary and other cost pressures will persist through the remainder of fiscal 2025 and there is no assurance these cost increases can be fully offset. Management currently estimates Prepared segment sales of approximately $115 million in fiscal 2026, subject to demand, pricing, and execution. The company will continue to assess evolving trade policies, adjust sourcing and pricing strategies, and take proactive measures to mitigate potential challenges, particularly regarding tariffs on Mexican imports. The ongoing evaluation against the NIST Cybersecurity Framework 2.0 is expected to be completed in Q4 2025, and a systematic program enhancement initiative for cybersecurity is underway.

Management Comments

• Management views these outcomes [VAT refunds] as a sign of progress in our broader tax strategy and of improved engagement with the SAT.
• Management believes this decision [Fifth Collegiate Circuit Court ruling] provides important judicial confirmation of CDM's maquila status, strengthens our position to recover outstanding IVA receivables, and bolsters our defense in the 2013 Assessment.
• 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 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 cash balance, cash flows from operations, availability under our credit facility, and other sources will be sufficient to satisfy our future capital expenditures and commitments, grower recruitment efforts, working capital and other financing requirements for the foreseeable future.

Industry Context

The fresh produce industry, particularly avocados and tomatoes, continues to face macroeconomic challenges including inflationary pressures on costs (labor, packaging, fuel) and shifts in trade policies. The termination of the U.S.-Mexico Tomato Suspension Agreement and the imposition of anti-dumping duties highlight increasing trade complexities that can disrupt supply chains and raise input costs. While the Prepared segment demonstrates strong growth, indicating a robust market for value-added avocado products, the Fresh segment remains susceptible to commodity price volatility, weather impacts, and regulatory actions like the FDA detention hold, which are common risks in agricultural imports.

Corporate Governance

Legal Proceedings

• The 2013 tax assessment by the Mexican Tax Administration Service (SAT) against Calavo de México (CDM) for approximately $160 million USD (inflation adjusted) plus $6.3 million USD for employee profit-sharing liability remains ongoing. Calavo has filed an Administrative Reconsideration and a Nullity Trial, believing the assessment is without merit.
• The Fifth Collegiate Circuit Court issued a ruling recognizing CDM as a maquila and directing the SAT to refund IVA balances for January through June 2013. The SAT has appealed this decision to the Mexican Supreme Court.
• An insurance claim has been submitted seeking recovery of costs associated with the FDA detention hold in July 2025, which remains under review.

Related Party Transactions

• Procured $2.7 million in avocados from entities owned or controlled by Board members for the three months ended July 31, 2025, and $4.3 million for the nine months.
• Procured $2.5 million in avocados from entities affiliated with the Chief Executive Officer for the three months ended July 31, 2025, and $6 million for the nine months.
• Outstanding payables of $0.7 million to entities affiliated with the CEO as of July 31, 2025.
• Advanced $1.6 million of preseason advances to Agricola Don Memo for the three months ended July 31, 2025, and $4.5 million for the nine months. Outstanding advances to Don Memo totaled $8.2 million as of July 31, 2025.
• Outstanding infrastructure loan balance of $1.6 million to Don Memo as of July 31, 2025.
• Incurred $2.2 million of cost of sales to Don Memo for the three months ended July 31, 2025, and $10.6 million for the nine months.
• Advanced $3.8 million of preseason advances to Belher for the three months ended July 31, 2025, and $3.9 million for the nine months. Grower advances due from Belher totaled $4.3 million as of July 31, 2025.
• Bridge loan balance of $0.5 million to Belher as of July 31, 2025.
• Incurred $2.9 million of cost of sales to Belher for the three months ended July 31, 2025, and $16 million for the nine months.
• Purchased approximately $1.2 million of avocados from partners of Avocados de Jalisco for the three months ended July 31, 2025, and $3 million for the nine months.

Stakeholder Impact

• Shareholders: Positive impact from the swing to net income, authorized stock repurchase program, and continued quarterly dividends ($0.20 per share). Potential for increased value if tax disputes are resolved favorably.
• Employees: Potential impact from the $6.3 million USD employee profit-sharing liability related to the 2013 Mexican tax assessment.
• Customers: Potential for supply chain disruptions and increased prices due to regulatory actions (FDA detention, avocado weevil) and trade policies (tomato tariffs).
• Suppliers (Growers): Impacted by sourcing shifts, market price volatility, and regulatory issues affecting product movement. Advances to growers and payables indicate ongoing relationships.
• Creditors: The company maintains sufficient liquidity with cash reserves, cash from operations, and available credit facility, indicating stable creditworthiness.
• Regulatory Authorities: Ongoing engagement with SAT on tax matters and FDA on product compliance.

Next Steps

• Continue to pursue collection of IVA refunds through administrative processes and legal remedies, including the appeal to the Mexican Supreme Court by the SAT.
• Submit an insurance claim seeking recovery of costs associated with the FDA detention hold.
• Assess the situation regarding U.S. trade policies and tariffs, adjust sourcing and pricing strategies as needed, and take proactive measures to mitigate potential challenges.
• Complete the ongoing evaluation against the NIST Cybersecurity Framework 2.0 in Q4 2025.
• Continue the systematic program enhancement initiative focused on elevating cybersecurity program maturity.
• Consider stock repurchases under the authorized $25 million program, depending on market conditions and capital allocation priorities.

Key Dates

Recommendation

While Calavo Growers demonstrated a significant turnaround to profitability and strong growth in its Prepared segment, the Fresh segment faces considerable headwinds from regulatory issues (FDA detention, avocado weevil) and adverse trade policies (tomato tariffs). The positive resolution of the FCPA inquiry and a favorable initial ruling on Mexican IVA are encouraging, but the substantial 2013 tax assessment remains a material contingent liability with an ongoing appeal. The authorized stock repurchase program provides some support, but the mixed operational performance and lingering legal uncertainties suggest a 'hold' position until there is clearer resolution on the tax matters and more consistent performance across both segments.

Keywords

Calavo Growers, CVGW, Avocados, Guacamole, Fresh Produce, Prepared Foods, SEC Filing, 10-Q, Financial Results, Quarterly Report, Mexico Operations, FDA Detention, Tax Assessment, IVA Refunds, FCPA, Tomato Tariffs, Supply Chain, Food Safety, Agricultural Products