Mission Produce, Inc. — Q3 2022 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2022. Dollar amounts are in millions unless otherwise noted. Mission Produce sources, farms, packs, markets and distributes avocados and other produce through Marketing and Distribution, International Farming and Blueberries segments.
Financial performance
| Metric | Three months ended July 31, 2022 | Prior year | Nine months ended July 31, 2022 | Prior year |
|---|---|---|---|---|
| Net sales | $313.2 | $246.8 | $807.9 | $654.7 |
| Gross profit / margin | $42.6 / 13.6% | $40.9 / 16.6% | $62.9 / 7.8% | $90.7 / 13.9% |
| Operating income | $22.0 | $23.7 | $4.9 | $42.6 |
| Net income attributable to Mission | $18.4 | $18.4 | $7.4 | $28.0 |
| Diluted EPS | $0.26 | $0.26 | $0.10 | $0.39 |
| Adjusted EBITDA | $31.6 | $30.1 | $30.4 | $58.9 |
| Operating cash flow | Not provided separately for the quarter | — | $(3.0) | $15.2 |
- Quarterly sales increased 27%; nine-month sales increased 23%. Management attributed growth primarily to avocado prices, which rose 42% and 45%, respectively, amid lower Mexican industry supply and inflation. Avocado volumes sold fell 11% in the quarter and 16% year to date.
- Quarterly gross profit rose 4%, but margin contracted 300 basis points. Nine-month gross profit fell 31%, with margin down 610 basis points. Management cited lower volume and fixed-cost absorption, first-quarter ERP disruption, and pressure in International Farming.
- Quarterly operating income declined despite higher revenue; nine-month operating income fell substantially. Year-to-date results also include lower profit and $3.8 million of ERP-related costs within adjusted EBITDA reconciliations.
- Cash, cash equivalents and restricted cash totaled $46.9 at July 31, versus $92.2 at October 31, 2021. Working capital was $144.3, down from $157.9.
- Gross debt was $157.7, including $8.8 current; net long-term debt after issuance costs was $157.3. The $100 million revolving facility had no borrowings outstanding at July 31. Variable-rate term loans had rates of 4.37% and 4.87%; interest expense increased as rates rose.
Changes, business developments and outlook
- On May 1, 2022, Mission began consolidating Moruga, in which it owns 60%, after amended governance terms gave Mission control of primary activities. The transaction added the Blueberries segment and a $20.2 noncontrolling interest; a $2.0 remeasurement gain was recorded. Prior-period results are not directly comparable for this business.
- Moruga’s new blueberry project plans approximately 600 additional hectares in Peru, with estimated total investment of about $50 million, funded by Moruga cash flow and pro-rata shareholder contributions. Work is expected to begin in phases in mid-to-late fiscal 2023. Blueberries generated $0.3 of sales and $(0.2) adjusted EBITDA in the reported period.
- The company implemented a new ERP system in November 2021. First-quarter operational problems affected purchasing, shipping, invoicing and inventory management and reduced profitability; management said most operational issues were largely resolved in the second quarter, with ongoing consulting costs continuing.
- Management expected fiscal 2022 capital expenditures to be lower than in recent fiscal years, without providing a forecast amount. Capital spending for the first nine months was $42.0.
- Operating cash flow is seasonal. Management attributed the nine-month cash outflow largely to working-capital needs, including higher inventory and receivables, and stated that individual-period cash flows may not reflect full-year performance.
- The company entered a 15-year U.K. distribution-facility lease beginning July 1, 2022. Total undiscounted operating lease liabilities were $107.9, including approximately $20 million related to that lease.
Risks, contingencies and other notable items
- Key exposures include avocado availability and market prices, weather and crop risks, customer concentration or lost customers, inflation and labor costs, transportation and supply-chain disruption, seasonality, international political and economic conditions, and foreign exchange.
- Variable-rate debt creates exposure to higher interest rates. The company reported compliance with its credit covenants at July 31, 2022: leverage ratio of 2.08 against a 3.25 maximum, and fixed-charge coverage of 1.94 against a 1.50 minimum.
- Management identified ERP implementation and systems integration, cybersecurity, and data-protection risks. It reported disclosure controls effective at period-end and continued integration of Moruga into financial reporting controls.
- Uncertain tax positions accrued were $14.4, including $8.0 of interest and penalties. The filing also describes pending approval of a previously agreed $0.8 settlement of California wage-and-labor class actions; other legal outcomes are described as unpredictable.
- Management cited the Russia-Ukraine conflict as a risk to global operations and the broader economy. No material changes to most previously disclosed risk factors were reported.
Investor facts to verify
- Whether avocado supply, pricing and volume trends—and the resulting gross-margin pressure—persist beyond the quarter.
- How much of the nine-month profit decline reflects the first-quarter ERP disruption, and whether remaining implementation costs or operational effects continue.
- Moruga’s operating contribution, final purchase-accounting allocation, and the timing, funding and returns of the planned $50 million blueberry expansion.
- Working-capital seasonality, cash generation, capital spending and liquidity available for debt service and planned investments.
- Exposure to variable interest rates, covenant headroom, and the effect of higher borrowing costs.
- Progress on the wage-and-labor settlement approval and the potential financial effects of tax uncertainties and other contingencies.