AVO

Business Context and Reporting Period

Company: Mission Produce, Inc. (AVO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2021 (Fiscal Second Quarter 2021)
Business Overview: A global leader in the avocado industry, engaged in farming, packaging, marketing, and distribution. The company operates two segments: Marketing & Distribution and International Farming (primarily in Peru).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales increased 6% ($13.1M) for the quarter compared to the prior year, driven by a 22% increase in volume sold, partially offset by a 14% decrease in average per-unit sales prices due to strong supply from Mexico. For the six-month period, sales decreased 3% ($11.2M) due to price declines outweighing volume gains.
• Profitability: Gross profit increased 26% for the quarter and 22% for the six-month period. Gross margin improved to 11.5% (quarter) and 12.2% (six months) from 9.7% and 9.8% respectively in the prior year, as lower per-unit prices resulted in margins representing a higher proportion of sales value.
• Expenses: Selling, general, and administrative (SG&A) expenses increased 47% ($5.2M) for the quarter, attributed to higher professional fees, employee costs, insurance premiums, rent for a new headquarters, and a $0.8 million legal settlement.
• Interest Expense: Decreased 65% ($1.5M) for the quarter due to lower LIBOR-based interest rates and reduced average debt balances.
• Cash Flow: Net cash used in operating activities was $20.2 million for the six months ended April 30, 2021, compared to $4.7 million in the prior year. This increase in cash usage was driven by unfavorable changes in working capital, specifically higher inventory levels and accounts receivable.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects to spend approximately $35 million on capital projects (farming expansion and facility improvements) during the second half of fiscal 2021.
• Dividends: No dividends were paid during the six months ended April 30, 2021, compared to $0.12 per share in the prior year period.
• Tax Changes: Peru enacted tax law changes effective January 1, 2021, repealing agribusiness benefits. This resulted in a discrete tax expense of $5.1 million and will subject the company to higher tax rates (20% to 29.5%) in future years.
• Legal Contingency: The company preliminarily agreed to settle two class action lawsuits regarding wage and labor laws for $0.8 million, recorded in SG&A. The settlement is subject to court approval.
• Key Risks: Significant risks include supply limitations, loss of major customers, international economic/political conditions (Mexico/Peru), avocado price fluctuations, seasonality, and the impact of the COVID-19 pandemic.

Investor Verification Checklist

• Working Capital Trends: Verify the sustainability of the $20.2 million cash outflow from operations, driven by inventory build-up and receivables growth.
• Peruvian Tax Impact: Assess the long-term effect of the new Peruvian tax regime on future net income and cash flows.
• Legal Settlement Finality: Confirm the final court approval of the $0.8 million wage and hour lawsuit settlement.
• Debt Covenants: Monitor compliance with the credit facility covenants (leverage ratio of 1.76:1.00 and fixed charge coverage of 2.64:1.00 as of April 30, 2021).
• Capital Project Execution: Track the $35 million planned capital expenditure spend in the second half of the fiscal year.