Mission Produce, Inc. — Fiscal Q1 2022 Form 10-Q
Reporting period: Three months ended January 31, 2022; comparisons are to the three months ended January 31, 2021 unless noted. Mission Produce sources, farms, packs, ripens and distributes avocados. Its reporting segments are Marketing and Distribution and International Farming. All amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $216.6 million | $173.2 million |
| Gross profit / margin | $0.5 million / 0.2% | $22.7 million / 13.1% |
| Operating income (loss) | $(18.2) million | $8.1 million |
| Net income (loss) | $(13.4) million; $(0.19) per diluted share | $2.2 million; $0.03 per diluted share |
| Adjusted EBITDA | $(10.4) million | $12.5 million |
| Net cash used in operating activities | $(41.4) million | $(9.7) million |
| Capital expenditures | $20.9 million | $22.4 million |
Revenue and margins: Sales rose 25%, driven by a 50% increase in average per-unit avocado prices amid lower Mexican industry supply and inflation. An 18% decline in avocado volume sold partly offset the price benefit. Gross profit fell 98%, with the gross margin declining from 13.1% to 0.2%.
Segments: Marketing and Distribution sales increased 25% to $212.3 million, while adjusted EBITDA fell to $(7.7) million from $13.7 million. International Farming sales were $4.3 million versus $3.6 million, and adjusted EBITDA was $(2.7) million versus $(1.2) million.
Cash, liquidity and debt: At January 31, 2022, cash and cash equivalents were $25.3 million, compared with $84.5 million at October 31, 2021; working capital was $130.6 million versus $157.9 million. Operating cash outflow reflected a $34.5 million use of working capital, including higher inventory and receivables, partly offset by grower payables. Investing cash outflow was $20.1 million and financing cash outflow was $2.5 million. Debt was $162.0 million before $0.3 million of issuance costs; $152.9 million was reported as long-term debt net of the current portion. The $100 million revolving facility was undrawn. The company reported compliance with its covenants and ratios of 2.47x leverage and 1.73x fixed-charge coverage, against limits of 2.75x maximum and 1.50x minimum, respectively.
Material changes and management commentary
- The new ERP system went live November 1, 2021. Implementation difficulties disrupted purchasing, receiving, shipping, inventory management and customer invoicing in Marketing and Distribution. The company said the disruption limited supply-chain management and profitability.
- Operational issues led to greater reliance on higher-cost third-party and packaged fruit, unusually large fruit disposals, and delayed customer payments. Combined with inflation—especially transportation costs—and weaker fixed-cost absorption on lower volume, these factors sharply reduced gross profit.
- SG&A increased 28% to $18.7 million, primarily due to ERP implementation costs, higher professional fees, travel and transaction costs. The company identified $1.5 million of noncapitalizable ERP implementation costs in its adjusted EBITDA reconciliation.
- International Farming adjusted EBITDA declined amid higher maintenance and operating costs for initiatives intended to improve yields. Farming earnings are typically concentrated in the third and fourth fiscal quarters, in line with the Peruvian harvest season.
- Other income was $1.6 million, mainly from interest-rate swap and foreign-currency gains. Equity-method income declined 30% to $1.6 million, primarily due to lower Moruga earnings.
- The prior-year income-tax provision included a $5.1 million discrete charge related to enacted Peruvian tax-rate changes. The company reported $13.7 million of accrued uncertain tax positions, including $7.6 million of interest and penalties.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said fiscal 2022 capital expenditures were not expected to materially deviate from amounts spent in recent fiscal years; expenditures in fiscal 2021 were $73.4 million. Management cautioned that interim results are not necessarily indicative of full-year results and described first-half working-capital cash flows as seasonally unfavorable.
Key risks include avocado supply and market-price volatility, lower volumes, seasonality, customer concentration, inflation and transportation costs, labor availability, international and foreign-exchange exposure, food safety, and supply-chain disruption. The filing added or emphasized risks from cybersecurity, system integration and ERP implementation disruptions, which can delay fulfillment, increase costs and adversely affect results. Management said disclosure controls were effective; the ERP implementation affected certain recordkeeping processes, and the company was assessing new controls.
The company disclosed California wage-and-labor class actions for which a preliminary $0.8 million settlement was agreed in May 2021, subject to court approval; the amount had been recorded in fiscal Q2 2021. The filing reported no material legal-proceeding updates during this quarter.
Important facts for investors to verify
- Whether ERP-related operating and invoicing problems have been remediated, and whether further costs, fruit losses or customer-payment delays arise.
- Whether gross margins recover as avocado supply, volumes, sourcing mix and transportation costs change.
- Whether seasonal working-capital needs and capital spending can be funded while maintaining liquidity and covenant compliance.
- Progress on the California settlement approval and any developments in the company’s uncertain tax positions.
- The effect of variable-rate debt, currency movements and the disclosed supply, labor, food-safety and cybersecurity risks.