Business context and reporting period
Mission Produce, Inc. filed this Form 10-Q for its fiscal second quarter and six months ended April 30, 2023. The company sources, farms, packs and distributes avocados and other fruit through Marketing and Distribution, International Farming and Blueberries. Moruga, which operates the blueberry business, has been consolidated since May 1, 2022; accordingly, current-period blueberry results do not have a comparable prior-period segment figure.
Financial performance
| Metric | Three months ended Apr. 30, 2023 | Three months ended Apr. 30, 2022 | Six months ended Apr. 30, 2023 | Six months ended Apr. 30, 2022 |
|---|---|---|---|---|
| Net sales | $221.1 million | $278.1 million | $434.6 million | $494.7 million |
| Gross profit / margin | $18.1 million / 8.2% | $19.8 million / 7.1% | $27.1 million / 6.2% | $20.3 million / 4.1% |
| Operating income (loss) | $(1.2) million | $1.1 million | $(11.3) million | $(17.1) million |
| Net income (loss) attributable to Mission | $(4.6) million | $2.4 million | $(13.4) million | $(11.0) million |
| Diluted EPS | $(0.07) | $0.03 | $(0.19) | $(0.16) |
| Adjusted EBITDA | $7.6 million | $9.2 million | $9.9 million | $(1.2) million |
For the quarter, sales fell 20%. A 36% decline in average avocado selling prices, associated with higher Mexican industry supply, more than offset 19% growth in avocado volume. For the six-month period, sales fell 12% as a 32% price decline outweighed 16% volume growth. Quarterly gross profit declined 9%, although gross margin increased 110 basis points; six-month gross profit and margin improved from the prior year, which had been affected by ERP implementation challenges. Higher interest expense and a lower contribution from derivative gains weighed on earnings.
Quarterly segment adjusted EBITDA was $8.6 million for Marketing and Distribution, $(1.1) million for International Farming and $0.1 million for Blueberries. Six-month segment adjusted EBITDA was $13.2 million, $(2.9) million and $(0.4) million, respectively. Blueberries’ six-month loss reflected weak U.S. and European prices amid strong supply.
Cash flow, balance sheet and liquidity
- For the six months, operating cash flow was $(26.1) million, versus $(37.0) million a year earlier. The company cited improved operating performance and more favorable working-capital movements; working capital changes still used $32.2 million of cash.
- Investing cash flow was $(37.5) million, including $34.9 million of property, plant and equipment purchases, compared with $(25.8) million of investing cash flow in the prior period. Spending included orchard development, a new UK distribution facility and $9.1 million for blueberry irrigation and early-stage cultivation.
- At April 30, cash and cash equivalents were $20.9 million, down from $52.8 million at October 31, 2022; working capital was $133.8 million, up from $126.4 million.
- Long-term debt was $174.3 million before $0.5 million of debt issuance costs, including $75.0 million drawn on the revolving facility. The facility has $250 million total capacity, comprising $150 million revolving capacity and $100 million in term loans. Variable rates on the revolving line and term loans were 6.76%, 6.83% and 7.08%, respectively.
- The company reported leverage and fixed-charge coverage ratios of 2.73x and 2.28x, respectively, and compliance with its 3.5x maximum leverage and 1.25x minimum fixed-charge coverage covenants. It had $0.7 million of letters of credit outstanding.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided. Management expects fiscal 2023 capital expenditures, excluding the Moruga Blueberry Project, to be below fiscal 2022’s $61.2 million. The blueberry project to develop approximately 1,500 additional acres is expected to require about $50 million in total; fiscal 2023 project capital expenditures were estimated at approximately $13 million, subject to timing and other factors.
- Management describes operating cash flow as seasonal: working capital typically rises in the first half as the company sources Mexican fruit and builds crops for later harvest. Results are sensitive to fruit prices and volumes, supply, weather, crop yields, customer demand, logistics, labor, inflation and foreign exchange. Blueberry sales are concentrated in the first and fourth fiscal quarters and substantially all production is sold to one distributor under an exclusive marketing agreement.
- Interest expense rose to $2.7 million for the quarter and $5.1 million for the six months, primarily from higher variable rates and greater average debt. Interest-rate swaps hedge $100 million of term-loan exposure; changes in swap fair value are recorded in other income or expense, not designated as cash-flow hedge accounting.
- A discrete Mexican uncertain-tax-position charge contributed to the current-period tax provision. At April 30, the company reported $18.5 million of accrued uncertain tax positions for income taxes, including $9.3 million of interest and penalties.
- Two California wage-and-hour class actions remain subject to settlement-scope issues. A hearing was scheduled for July 2023; the company had previously recorded a $0.8 million settlement accrual.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether avocado prices and volume, particularly the effect of Mexican supply, support a recovery in sales and gross profit.
- Whether seasonal working-capital needs and planned capital spending can be funded while preserving liquidity and covenant headroom.
- How variable borrowing costs, debt balances and the interest-rate swaps affect future interest expense and reported earnings.
- Progress, funding and returns from the Moruga blueberry expansion, including exposure to concentrated distribution and volatile market prices.
- Developments in the California class actions and Mexican tax positions, including any changes to expected financial exposure.