Item 1A. Risk Factors
Risks Related to Our Agribusiness Operations
Adverse weather conditions, natural disasters, including earthquakes and wildfires, and other natural conditions, including the effects of climate change, could impose significant costs and losses on our business.
Fresh produce is vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common and may occur with higher frequency or be less predictable in the future due to the effects of climate change. Unfavorable growing conditions can reduce both crop size and crop quality. In extreme cases, entire harvests may be lost in some geographic areas.
All of our crops are subject to damage from frosts and freezes, and this has happened periodically in the recent past. In some cases, the fruit is damaged or ruined; in the case of extended periods of cold, the trees can also be damaged or killed.
Additionally, a significant portion of our agricultural plantings and our corporate headquarters are located in a region of California that is prone to natural disasters such as earthquakes and wildfires. For example, in December 2017, high winds and the related Southern California wildfires caused a brief power outage at our Santa Paula, California packinghouse and destroyed 14 of our 256 farm worker housing units. While our orchards did not suffer significant damage in the wildfire, the potential for significant damage to a substantial amount of our plantings from a natural disaster in the future continues to exist. Furthermore, if a natural disaster or other event occurs that prevents us from using all or a significant portion of our corporate headquarters, as a result of a power outage or otherwise, or that damages critical infrastructure, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial amount of time.
For the foregoing reasons, adverse weather conditions, natural disasters, including earthquakes and wildfires, or other natural conditions, including the effects of climate change, could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.
Our agricultural plantings are potentially subject to damage from disease and pests, which could impose losses on our business and the prevention of which could impose significant additional costs on us.
Fresh produce is also vulnerable to crop disease and to pests, e.g., Mediterranean Fruit Fly and the Asian Citrus Psyllid (“ACP”), which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions.
One such pest is ACP, an aphid–like insect that is a serious pest to all citrus plants because it can transmit the disease, Huanglongbing (“HLB”), when it feeds on the plants’ leaves and trees. By itself, ACP causes only minor cosmetic damage to citrus trees. HLB, however, is considered one of the most devastating diseases of citrus in the world. Trees infected with HLB decline in health, produce inedible fruit and eventually die, usually in 3 to 5 years after becoming infected. Currently, there is no cure for the disease and infected trees must be removed and destroyed to prevent further spreading.
ACP is a federal action quarantine pest subject to interstate and international quarantine restrictions by the United States Department of Agriculture (“USDA”), including a prohibition on the movement of nursery stock out of quarantine areas and a requirement that all citrus fruit be cleaned of leaves and stems prior to movement out of the quarantine area. ACP and HLB exist domestically in Florida, Louisiana, Georgia, South Carolina and Texas and internationally in countries such as Mexico. ACP exists in California, including in our orchards. To date, HLB has also been detected in Los Angeles, Orange, Riverside and San Bernardino Counties in California. There can be no assurance that HLB will not be further detected in the future. Due to the discovery of ACP in our orchards, we have experienced costs related to the quarantine and treatment of ACP and incurred approximately $0.8 million of costs in fiscal year 2020 related to pest control efforts targeted against ACP. To date, there has been no HLB detected in our orchards.
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There are a number of registered insecticides known to be effective against ACP. However, certain markets and customer responses to the discovery of ACP and the related quarantine could result in a significant decline in revenue due to restrictions on where our lemons can be sold and lower demand for our lemons. Additional government regulations and other quarantine requirements or customer handling and inspection requirements could increase agribusiness costs to us. Our citrus orchards could be at risk if ACP starts to transmit the HLB disease to our trees. Agribusiness costs could also increase significantly as a result of HLB. For example, a study in Florida indicated the presence of HLB has increased citrus production costs by as much as 40%.
The costs to control these diseases and other infestations vary depending on the severity of the damage and the extent of the plantings affected. Moreover, there can be no assurance that available technologies to control such infestations will continue to be effective. These infestations can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
Our strategy of marketing and selling our lemons directly to our food service, wholesale and retail customers may not continue to be successful.
Directly obtaining and retaining customers, particularly chain stores and other large customers, is highly competitive, and the prices or other terms of our sales arrangements may not be sufficient to retain existing business, maintain current levels of profitability or obtain new business. Industry consolidation (horizontally and vertically) and other factors have increased the buying leverage of the major grocery retailers in our markets, which may put further downward pressure on our pricing and volume and could adversely affect our results of operations.
We depend on our relationship with Calavo and their ability to sell our avocados. Any disruption in this relationship could harm our sales.
We sell a majority of the avocados we grow to Calavo and depend on their willingness and ability to market and sell our avocados to consumers. Calavo sources its avocados from many growers and we cannot control who they will purchase from and how large their orders may be. Should there be any change in our current relationship structure, whereby they buy a majority of our avocado crop, we would need to find replacement buyers to purchase our remaining crop, which could take time and expense and may result in less favorable terms of sale. Any loss of Calavo as a customer on a whole may cause a material loss in our profits, as it may take time to fill any such void.
Our earnings are sensitive to fluctuations in market supply and prices and demand for our products.
Excess supplies often cause severe price competition in our industry. Growing conditions in various parts of the world, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product. The ongoing COVID-19 pandemic has also reduced the demand for our products resulting in excess supplies.
Fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. Some items, such as avocados, oranges and specialty citrus, must be sold more quickly, while other items, such as lemons, can be held in cold storage for longer periods of time. The selling price received for each type of produce depends on all of these factors, including the availability and quality of the produce item in the market and the availability and quality of competing types of produce.
In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, produce items which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.
Our earnings may be subject to seasonal variability.
Our earnings may be affected by seasonal factors, including:
•the seasonality of our supplies and consumer demand;
•the ability to process products during critical harvest periods; and
•the timing and effects of ripening and perishability.
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Our lemons are generally grown and marketed throughout the year. Our Navel oranges are sold generally from January through April and our Valencia oranges are sold generally from June through September. Our avocados are sold generally from January through August. Our specialty citrus is sold generally from November through June and our pistachios and wine grapes are sold generally in September and October.
Increases in commodity or raw product costs, such as fuel and paper, could adversely affect our operating results.
Many factors may affect the cost and supply of fresh produce, including external conditions, commodity market fluctuations, currency fluctuations, changes in governmental laws and regulations, agricultural programs, severe and prolonged weather conditions and natural disasters. Increased costs for purchased fruit have negatively impacted our operating results in the past, and there can be no assurance that they will not adversely affect our operating results in the future.
The price of various commodities can significantly affect our costs. The cost of petroleum-based products is volatile and there can be no assurance that there will not be further increases in such costs in the future. If the price of oil rises, the costs of our herbicides and pesticides can be significantly impacted.
The cost of paper is also significant to us because some of our products are packed in cardboard boxes for shipment. If the price of paper increases and we are not able to effectively pass these price increases along to our customers, then our operating income will decrease. Increased costs for paper have negatively impacted our operating income in the past, and there can be no assurance that these increased costs will not adversely affect our operating results in the future.
Increases in labor, personnel and benefits costs could adversely affect our operating results.
We primarily utilize labor contractors to grow, harvest and deliver our fruit to our lemon packinghouse or outside packing facilities. We utilize a combination of employees and labor contractors to process our lemons in our lemon packing facility. Our employees and contractors are in demand by other agribusinesses and other industries. Shortages of labor could delay our harvesting or lemon processing activities or could result in increases in labor costs.
Our labor contractors and we are subject to government mandated wage and benefit laws and regulations. For example, the State of California, where a substantial number of our labor contractors are located, passed regulations that increased minimum wage rates from $13.00 per hour to $14.00 per hour, effective January 1, 2021, and will increase to $15.00 per hour in 2022. The State of Arizona also increased minimum wage rates from $11.00 per hour to $12.00 per hour, effective January 1, 2020, and effective January 1, 2021 the wage rates will rise each year based on the annual cost of living. In addition, current or future federal or state healthcare legislation and regulation, including the Affordable Care Act, may increase our medical costs or the medical costs of our labor contractors that could be passed on to us.
Changes in immigration laws could impact the ability of Limoneira to harvest its crops.
We engage third parties to provide personnel for our harvesting operations. The availability and number of such workers is subject to decrease if there are changes in U.S. immigration laws. The states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and the U.S. Congress and the Department of Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations or enforcement programs. Immigration laws have recently been an area of considerable focus by the Department of Homeland Security, with enforcement operations taking place across the country, resulting in arrests and detentions of unauthorized workers. Termination of a significant number of personnel who are found to be unauthorized workers or the scarcity of available personnel to harvest our agricultural products could cause harvesting costs to increase or could lead to the loss of product that is not timely harvested, which could have a material adverse effect to our citrus grove operations, financial position, results of operations and cash flows.
The lack of sufficient water would severely impact our ability to produce crops or develop real estate.
The average rainfall in Ventura, Tulare, San Luis Obispo and San Bernardino Counties in California is substantially below amounts required to grow crops and therefore we are dependent on our rights to pump water from underground aquifers. Extended periods of drought in California may put additional pressure on the use and availability of water for agricultural uses, and in some cases, governmental authorities have diverted water to other uses. As California has grown in population, there are increasing and multiple pressures on the use and distribution of water, which many view as a finite resource. Lack of available potable water can also limit real estate development.
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Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water and water from local water districts in Tulare County and we use ground water in San Bernardino County. Following our acquisition of Associated, we began using federal project water in Arizona from the Colorado River through the YMIDD. We also have acquired water rights in Chile related to our acquisitions of PDA and San Pablo.
California has historically experienced periods of below average precipitation. The governor of California declared a drought State of Emergency in February 2014 and the next few years were among the most severe droughts on record. Rainfall, snow levels and water content of snow pack were significantly below historical averages. These conditions resulted in reduced water levels in streams, rivers, lakes, aquifers and reservoirs. Precipitation in 2017 brought relief to California’s drought conditions and the State of Emergency was lifted in April 2017. California has experienced below average precipitation two of the last three years and according to the US Drought Monitor, the 2020 season ended with California experiencing abnormally dry drought conditions. Federal officials oversee the Central Valley Project, California’s largest water delivery system and 100% of the contracted amount of water was provided to San Joaquin Valley farmers in 2017 through 2020 compared to 75% in 2016 and zero in 2015 and 2014.
For fiscal year 2020, irrigation costs for our agricultural operations were $0.1 million lower than fiscal year 2019. Costs may increase as we pump more water than our historical averages and federal, state and local water delivery infrastructure costs may increase to access these limited water supplies. We have an ongoing plan for irrigation improvements in fiscal year 2021 that includes drilling new wells and upgrading existing wells and irrigation systems.
We believe we have access to adequate supplies of water for our agricultural operations as well as our real estate development and rental operations and currently do not anticipate that future drought conditions will have a material impact on our operating results. However, if future drought conditions are worse than prior drought conditions or if regulatory responses to such conditions limit our access to water, our business could be negatively impacted by these conditions and responses in terms of access to water and/or cost of water.
The use of herbicides, pesticides and other potentially hazardous substances in our operations may lead to environmental damage and result in increased costs to us.
We use herbicides, pesticides and other potentially hazardous substances in the operation of our business. We may have to pay for the costs or damages associated with the improper application, accidental release or use or misuse of such substances. Our insurance may not be adequate to cover such costs or damages or may not continue to be available at a price or under terms that are satisfactory to us. In such cases, payment of such costs or damages could have a material adverse effect on our business, results of operations and financial condition.
Environmental and other regulation of our business, including potential climate change regulation, could adversely impact us by increasing our production cost or restricting our ability to import certain products into the United States.
Our business depends on the use of fertilizers, pesticides and other agricultural products. The use and disposal of these products in some jurisdictions are subject to regulation by various agencies. A decision by a regulatory agency to significantly restrict the use of such products that have traditionally been used in the cultivation of one of our principal products could have an adverse impact on us. Under the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Food, Drug and Cosmetic Act and the Food Quality Protection Act of 1996, the EPA is undertaking a series of regulatory actions relating to the evaluation and use of pesticides in the food industry. Similarly, in the EU, regulation (EC) No. 1107/2009 fundamentally changed the pesticide approval process to hazard criteria based on the intrinsic properties of the substance. These actions and future actions regarding the availability and use of pesticides could have an adverse effect on us. In addition, if a regulatory agency were to determine that we are not in compliance with a regulation in that agency’s jurisdiction, this could result in substantial penalties and a ban on the sale of part or all of our products in that jurisdiction.
A global economic downturn may have an adverse impact on participants in our industry, which cannot be fully predicted.
The full impact of a global economic downturn on customers, vendors and other business partners such as seen with the COVID-19 pandemic cannot be anticipated. For example, major customers or vendors may have financial challenges unrelated to us that could result in a decrease in their business with us or, in extreme cases, cause them to file for bankruptcy protection. Similarly, parties to contracts may be forced to breach their obligations under those contracts. Although we exercise prudent oversight of the credit ratings and financial strength of our major business partners and seek to diversify our risk to any single business partner, there can be no assurance that there will not be a bank, insurance company, supplier, customer or other financial partner that is unable to meet
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its contractual commitments to us. Similarly, stresses and pressures in the industry may result in impacts on our business partners and competitors, which could have wide-ranging impacts on the future of the industry.
We are subject to the risk of product contamination and product liability claims.
The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability insurance however, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage.
We are subject to transportation risks.
An extended interruption in our ability to ship our products could have a material adverse effect on our business, financial condition and results of operations. Similarly, any extended disruption in the distribution of our products could have a material adverse effect on our business, financial condition and results of operations. While we believe we are adequately insured and would attempt to transport our products by alternative means if we were to experience an interruption due to strike, natural disasters or otherwise, we cannot be sure that we would be able to do so or be successful in doing so in a timely and cost-effective manner.
Events or rumors relating to LIMONEIRA or our other trademarks and related brands could significantly impact our business.
Consumer and institutional recognition of the LIMONEIRA, Santa®, Paula®, Bridal Veil®, Fountain®, Golden Bowl®, Level®, Kiva®, Kachina®, Oxnard Lemon, Uno, Sunny, Trapani, Argentinian Beauty, Natural and Trapani Fresh trademarks and related brands and the association of these brands with high quality and safe food products are an integral part of our business. The occurrence of any events or rumors that cause consumers and/or institutions to no longer associate these brands with high quality and safe food products may materially adversely affect the value of our brand names and demand for our products.
Government regulation could increase our costs of production and increase legal and regulatory expenses.
Growing, packaging, storing and distributing food products are activities subject to extensive federal, state and local regulation, as well as foreign regulation. The U.S. Food and Drug Administration (the “FDA”), the USDA and various state and local public health and agricultural agencies regulate these aspects of our operations. Our business is subject to the FDA Food Safety Modernization Act to ensure food safety. This Act provides direct recall authority to the FDA and includes a number of other provisions designed to enhance food safety, including increased inspections by the FDA of food facilities. The Federal Perishable Agricultural Commodities Act, which specifies standards for the sale, shipment, inspection and rejection of agricultural products, governs our relationships with our fresh food suppliers with respect to the grading and commercial acceptance of product shipments. Import and export controls and similar laws and regulations, in both the United States and elsewhere affect our business. Issues such as health and safety, which may slow or otherwise restrict imports and exports, could adversely affect our business. In addition, the modification of existing laws or regulations or the introduction of new laws or regulations could require us to make material expenditures or otherwise adversely affect the way that we have historically operated our business.
Our strategy to expand international production and marketing may not be successful and may subject us to risks associated with doing business in corrupt environments.
While we intend to expand our lemon supply sources to international markets and explore opportunities to expand our international production and marketing of lemons, we may not be successful in implementing this strategy. Additionally, in many countries outside of the United States, particularly in those with developing economies, it may be common for others to engage in business practices prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act or similar local anti-bribery laws. These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially and adversely affect our financial condition and results of operations.
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We depend on our infrastructure to have sufficient capacity to handle our annual lemon production needs.
We have an infrastructure that has sufficient capacity for our lemon production needs, but if we lose machinery or facilities due to natural disasters or mechanical failure, we may not be able to operate at a sufficient capacity to meet our lemon production needs. This could have a material adverse effect on our business, which could impact our results of operations and our financial condition.
Risks Related to Our Indebtedness
We may be unable to generate sufficient cash flow to service our debt obligations.
To service our debt, we require a significant amount of cash. Our ability to generate cash, make scheduled payments or refinance our obligations depends on our successful financial and operating performance. Our financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions and various financial, business and other factors, many of which are beyond our control. These factors include among others:
•economic and competitive conditions;
•changes in laws and regulations;
•operating difficulties, increased operating costs or pricing pressures we may experience; and
•delays in implementing any strategic projects.
If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. If we are required to take any actions referred to above, it could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that we would be able to take any of these actions on terms acceptable to us, or at all, or that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt agreements.
Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely restrict our financial and operating flexibility and subject us to other risks.
Our revolving and non-revolving credit and term loan facilities contain various restrictive covenants that limit our ability to take certain actions. In particular, these agreements limit our ability to, among other things:
•incur additional indebtedness;
•make certain investments or acquisitions;
•create certain liens on our assets;
•engage in certain types of transactions with affiliates;
•merge, consolidate or transfer substantially all our assets; and
•transfer and sell assets.
Our revolving and non-revolving credit facility with the Farm Credit West Credit Facility and our Wells Fargo Term Loan contain a financial covenant that requires us to maintain compliance with a specified debt service coverage ratio on an annual basis. In August 2020, Farm Credit West modified the covenant to defer measurement at October 31, 2020 with measurement resuming as of October 31, 2021. At October 31, 2020, we were not in compliance with the debt service coverage ratio for Wells Fargo and the non-compliance was waived. Our failure to comply with this covenant in the future may result in the declaration of an event of default under our Farm Credit West Credit Facility and Wells Fargo Term Loan.
Any or all of these covenants could have a material adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations. Any future debt could also contain financial and other covenants more restrictive than those imposed under our line of credit and term loan facilities. A breach of a covenant or other provision in any credit facility governing our current and future indebtedness could result in a default under that facility and, due to cross-default and cross-acceleration provisions, could result in a default under our other credit facilities. Upon the occurrence of an event of default under any of our credit facilities, the applicable lender(s) could elect to declare all amounts outstanding to be immediately due and payable and, with respect to our revolving credit facility, terminate all commitments to extend further credit. If we were unable to repay those amounts, our lenders could proceed against the collateral granted to them to
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secure the indebtedness. If the lenders under our current or future indebtedness were to accelerate the payment of the indebtedness, we cannot assure you that our assets or cash flow would be sufficient to repay in full our outstanding indebtedness.
Despite our relatively high current indebtedness levels and the restrictive covenants set forth in agreements governing our indebtedness, we may still incur significant additional indebtedness, including secured and guaranteed indebtedness. Incurring more indebtedness could increase the risks associated with our substantial indebtedness.
Subject to the restrictions in our credit facilities, we may incur significant additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could increase.
In January 2018, the Joint Venture entered into a $45.0 million unsecured Line of Credit Loan Agreement and Promissory Note (the “Loan”) with Bank of America, N.A. to fund early development activities. The Loan originally matured in January 2020 and was extended to February 22, 2021 per the terms thereof. The interest rate on the Loan is LIBOR plus 2.85% and is payable monthly. The Loan contains certain customary default provisions and the Joint Venture may prepay any amounts outstanding under the Loan without penalty. In February 2018, certain principals from Lewis and by the Company guaranteed the obligations under the Loan. Defaults by the Joint Venture could increase our indebtedness.
Some of our debt is based on variable rates of interest, which could result in higher interest expenses in the event of an increase in the interest rates.
Our Farm Credit West Credit Facility currently bears interest at a variable rate, which will generally change as interest rates change. We bear the risk that the rates we are charged by our lender will increase faster than the earnings and cash flow of our business, which could reduce profitability, adversely affect our ability to service our debt, cause us to breach covenants contained in our Farm Credit West Credit Facility, which could materially adversely affect our business, financial condition and results of operations. Several of the Company’s debt agreements use LIBOR as a reference rate. The expected discontinuation of LIBOR after 2021 could have a significant impact on the Company if we cannot replace LIBOR with alternative reference rates at or below the current LIBOR rate.
Global capital and credit market issues affect our liquidity, increase our borrowing costs and may affect the operations of our suppliers and customers.
The global capital and credit markets have experienced increased volatility and disruption over the past several years, making it more difficult for companies to access those markets. We depend in part on stable, liquid and well-functioning capital and credit markets to fund our operations. Although we believe that our operating cash flows and existing credit facilities will permit us to meet our financing needs for the foreseeable future, there can be no assurance that continued or increased volatility and disruption in the capital and credit markets will not impair our liquidity or increase our costs of borrowing. Our business could also be negatively impacted if our suppliers or customers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy.
Risks Related to Our Real Estate Development Operations
We are involved in a cyclical industry and are affected by changes in general and local economic conditions.
The real estate development industry is cyclical and is significantly affected by changes in general and local economic conditions, including:
•employment levels;
•availability of financing;
•interest rates;
•consumer confidence;
•demand for the developed product, whether residential or industrial;
•supply of similar product, whether residential or industrial; and
•local, state and federal government regulation, including eminent domain laws, which may result in taking for less compensation than the owner believes the property is worth.
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The process of project development and the commitment of financial and other resources occur long before a real estate project comes to market. A real estate project could come to market at a time when the real estate market is depressed. It is also possible in a rural area like ours that no market for the project will develop as projected.
A recession in the global economy, or a downturn in national or regional economic conditions, could adversely impact our real estate development business.
Future economic instability or tightening in the credit markets could lead to another housing market collapse, which could adversely affect our real estate development operations. Our future real estate sales, revenues, financial condition and results of operations could suffer as a result. Our business is especially sensitive to economic conditions in California and Arizona, where our properties are located.
Higher interest rates and lack of available financing can have significant impacts on the real estate industry.
Higher interest rates generally impact the real estate industry by making it harder for buyers to qualify for financing, which can lead to a decrease in the demand for residential, commercial or industrial sites. Any decrease in demand will negatively impact our proposed developments. Since the most recent recession, the U.S. Federal Reserve has taken actions that have resulted in low interest rates prevailing in the marketplace for a historically long period of time. Market interest rates may increase in the future and the increase may materially and negatively affect us. Lack of available credit to finance real estate purchases can also negatively impact demand. Any downturn in the economy or consumer confidence can also be expected to result in reduced housing demand and slower industrial development, which would negatively impact the demand for land we are developing.
We are subject to various land use regulations and require governmental approvals for our developments that could be denied.
In planning and developing our land, we are subject to various local, state, and federal statutes, ordinances, rules and regulations concerning zoning, infrastructure design, subdivision of land, and construction. All of our new developments require amending existing general plan and zoning designations, so it is possible that our entitlement applications could be denied. In addition, the zoning that ultimately is approved could include density provisions that would limit the number of homes and other structures that could be built within the boundaries of a particular area, which could adversely impact the financial returns from a given project. In addition, in the past, many states, cities and counties (including Ventura County) have approved various “slow growth” or “urban limit line” measures.
If unforeseen regulatory challenges with East Areas I and II occur, we may not be able to develop these projects as planned and the approximately $78.8 million investment we have in the projects could be impaired in the future.
Third-party litigation could increase the time and cost of our real estate development efforts.
The land use approval processes we must follow to ultimately develop our projects have become increasingly complex. Moreover, the statutes, regulations and ordinances governing the approval processes provide third parties the opportunity to challenge the proposed plans and approvals. As a result, the prospect of third-party challenges to planned real estate developments provides additional uncertainties in real estate development planning and entitlements. Third-party challenges in the form of litigation would, by their nature, adversely affect the length of time and the cost required to obtain the necessary approvals. In addition, adverse decisions arising from any litigation would increase the costs and length of time to obtain ultimate approval of a project and could adversely affect the design, scope, plans and profitability of a project.
We are subject to environmental regulations and opposition from environmental groups that could cause delays and increase the costs of our real estate development efforts or preclude such development entirely.
Environmental laws that apply to a given site can vary greatly according to the site’s location and condition, the present and former uses of the site, and the presence or absence of sensitive elements like wetlands and endangered species. Environmental laws and conditions may (i) result in delays, (ii) cause us to incur additional costs for compliance, where a significant amount of our developable land is located, mitigation and processing land use applications, or (iii) preclude development in specific areas. In addition, in California, third parties have the ability to file litigation challenging the approval of a project, which they usually do by alleging inadequate disclosure and mitigation of the environmental impacts of the project. While we have worked with representatives of various environmental interests and wildlife agencies to minimize and mitigate the impacts of our planned projects, certain groups opposed to development may oppose our projects vigorously, so litigation challenging their approval could occur. Recent concerns over the impact of development on water availability and global warming increases the breadth of potential obstacles that our developments face.
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Our developable land is concentrated entirely in California and Arizona.
All of our developable land is located in California and Arizona, and our business is especially sensitive to the economic conditions within California. Any adverse change in the economic climate of California, Arizona, or our regions of those states, and any adverse change in the political or regulatory climate of California or Arizona, or the counties where our land is located in such states, could adversely affect our real estate development activities. Ultimately, our ability to sell or lease lots may decline as a result of weak economic conditions or restrictive regulations.
If the real estate industry weakens or instability of the mortgage industry and commercial real estate financing exists, it could have an adverse effect on our real estate activities.
If the residential real estate market weakens or instability of the mortgage industry and commercial real estate financing exists, our residential real estate business could be adversely affected. An excess supply of homes available due to foreclosures or the expectation of deflation in house prices could also have a negative impact on our ability to sell our inventory when it becomes available.
We rely on contractual arrangements with third party advisors to assist us in carrying out our real estate development projects and are subject to risks associated with such arrangements.
We utilize third party contractor and consultant arrangements to assist us in operating our real estate development segment. These contractual arrangements may not be as effective in providing direct control over this business segment. For example, our third-party advisors could fail to take actions required for our real estate development businesses despite their contractual obligation to do so. If the third-party advisors fail to perform under their agreements with us, we may have to rely on legal remedies under the law, which may not be effective. In addition, we cannot assure you that our third-party advisors would always act in our best interests.
If we are unable to complete land development projects within forecasted time and budget expectations, if at all, our financial results may be negatively affected.
We intend to develop land and real estate properties as suitable opportunities arise, taking into consideration the general economic climate. New real estate development projects have a number of risks, including the following:
•Construction delays or cost overruns that may increase project costs;
•Receipt of zoning, occupancy and other required governmental permits and authorizations;
•Development costs incurred for projects that are not pursued to completion;
•Earthquakes, hurricanes, floods, fires or other natural disasters that could adversely affect a project;
•Defects in design or construction that may result in additional costs to remedy or require all or a portion of a property to be closed during the period required to rectify the situation;
•Our ability to raise capital;
•The impact of governmental assessments such as park fees or affordable housing requirements;
•Governmental restrictions on the nature and size of a project or timing of completion; and
•The potential lack of adequate building/construction capacity for large development projects.
If any development project is not completed on time or within budget, our financial results may be negatively affected.
If we are unable to obtain required land use entitlements at reasonable costs, or at all, our operating results would be adversely affected.
The financial performance of our real estate development activities is closely related to our success in obtaining land use entitlements for proposed development projects. Obtaining all of the necessary entitlements to develop a parcel of land is often difficult, costly and may take several years, or more, to complete. In some situations, we may be unable to obtain the necessary entitlements to proceed with a real estate development or may be required to alter our plans for the development. Delays or failures to obtain these entitlements may have a material adverse effect on our financial results.
We could experience a reduction in revenues or reduced cash flows if we are unable to obtain reasonably priced financing to support our real estate development projects and land development activities.
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The real estate development industry is capital intensive, and development requires significant up-front expenditures to develop land and begin real estate construction. Accordingly, we have and may continue to incur substantial indebtedness to finance our real estate development and land development activities. Although we believe that internally generated funds and current and available borrowing capacity will be sufficient to fund our capital and other expenditures, including additional land acquisition, development and construction activities, and the amounts available from such sources may not be adequate to meet our needs. If such sources were insufficient, we would seek additional capital in the form of debt from a variety of potential sources, including bank financing. The availability of borrowed funds to be used for additional land acquisition, development and construction may be greatly reduced, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with new loans. The failure to obtain sufficient capital to fund our planned expenditures could have a material adverse effect on our business and operations and our results of operations in future periods.
We may encounter risks associated with the real estate joint venture we entered into in November 2015 with the Lewis Group of Companies including:
•the joint venture may not perform financially or operationally as expected;
•land values, project costs, sales absorption or other assumptions included in the development plans may cause the joint venture’s operating results to be less than expected;
•the joint venture may not be able to obtain project loans on acceptable terms;
•the joint venture partners may not be able to provide capital to the joint venture in the event external financing or project cash flows are not sufficient to finance the joint venture’s operations;
•the joint venture partners may not manage the project properly; and
•disagreements could occur between the joint venture partners that could affect the operating results of the joint venture or could result in a sale of a partner’s interest or the joint venture at undesirable values.
We may encounter other risks that could impact our ability to develop our land.
We may also encounter other difficulties in developing our land, including:
•natural risks, such as geological and soil problems, earthquakes, fire, heavy rains and flooding and heavy winds;
•shortages of qualified trades people;
•reliance on local contractors, who may be inadequately capitalized;
•shortages of materials;
•increases in the cost of certain materials; and
•environmental remediation costs.
General Risks and Risks Related to Our Common Stock
Our business is highly competitive and we cannot assure you that we will maintain our current market share.
Many companies compete in our different businesses. However, only a few well-established companies operate on an international, national and regional basis with one or several product lines. We face strong competition from these and other companies in all our product lines.
Important factors with respect to our competitors include the following:
•Some of our competitors may have greater operating flexibility and, in certain cases, this may permit them to respond better or more quickly to changes in the industry or to introduce new products and packaging more quickly and with greater marketing support.
•We cannot predict the pricing or promotional actions of our competitors or whether those actions will have a negative effect on us.
There can be no assurance that we will continue to compete effectively with our present and future competitors, and our ability to compete could be materially adversely affected by our debt levels and debt service requirements.
Currency exchange fluctuation may impact the results of our operations.
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We distribute our products both nationally and internationally. Our international sales are primarily transacted in U.S. dollars. Our results of operations are affected by fluctuations in currency exchange rates in both sourcing and selling locations. In the past, periods of a strong U.S. dollar relative to other currencies have led international customers, particularly in Asia, to find alternative sources of fruit.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
We currently depend heavily on the services of our key management personnel. The loss of any key personnel could materially and adversely affect our results of operations, financial condition, or our ability to pursue land development. Our success will also depend in part on our ability to attract and retain additional qualified management personnel.
Inflation can have a significant adverse effect on our operations.
Inflation can have a major impact on our farming operations. The farming operations are most affected by escalating costs and unpredictable revenues (due to an oversupply of certain crops) and very high irrigation water costs. High fixed water costs related to our farm lands will continue to adversely affect earnings. Prices received for many of our products are dependent upon prevailing market conditions and commodity prices. Therefore, it is difficult for us to accurately predict revenue and we cannot pass on cost increases caused by general inflation, except to the extent reflected in market conditions and commodity prices.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to customers, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
Computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, packing, distribution or other critical functions.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.
The acquisition of other businesses could pose risks to our operating income.
We intend to continue to consider acquisition prospects that we think complement our business. While we are not currently a party to any agreement with respect to any acquisitions, we may acquire other businesses in the future. Future acquisitions by us could result in accounting charges, potentially dilutive issuances of equity securities, and increased debt and contingent liabilities, any of which could have a material adverse effect on our business and the market price of our common stock. Acquisitions entail numerous risks, including the integration of the acquired operations, diversion of management’s attention to other business concerns, risks of entering markets in which we have limited prior experience, and potential loss of key employees of acquired organizations. We may be unable to successfully integrate businesses or the personnel of any business that might be acquired in the future, and our failure to do so could have a material adverse effect on our business and on the market price of our common stock.
The value of our common stock could be volatile.
Investing in our common stock involves a high degree of risk. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. The risks described here are not the only ones we will face. If any of these risks or other risks actually occurs, our business, financial condition, results of operations or future prospects could be materially and adversely
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affected. In such event, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment.
The overall market and the price of our common stock may fluctuate greatly and we cannot assure you that you will be able to resell shares at or above market price. The trading price of our common stock may be significantly affected by various factors, including:
•quarterly fluctuations in our operating results;
•changes in investors’ and analysts’ perception of the business risks and conditions of our business;
•our ability to meet the earnings estimates and other performance expectations of financial analysts or investors;
•unfavorable commentary or downgrades of our stock by equity research analysts;
•fluctuations in the stock prices of our peer companies or in stock markets in general; and
•general economic or political conditions.
Concentrated ownership of our common stock creates a risk of sudden change in our share price.
As of October 31, 2020, directors and members of our executive management team beneficially owned or controlled approximately 5.8% of our common stock. Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large stockholders of a significant portion of that stockholder’s holdings could have a material adverse effect on the market price of our common stock. In addition, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly.
Our charter documents contain provisions that may delay, defer or prevent a change of control.
Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders. These provisions include the following:
•division of our board of directors into three classes, with each class serving a staggered three-year term;
•removal of directors by stockholders by a supermajority of two-thirds of the outstanding shares;
•ability of the board of directors to authorize the issuance of preferred stock in series without stockholder approval; and
•prohibitions on our stockholders that prevent them from acting by written consent and limitations on calling special meetings.
We incur increased costs as a result of being a publicly traded company.
As a Company with publicly traded securities, we have incurred, and will continue to incur, significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules promulgated by the SEC and NASDAQ, require us to adopt corporate governance practices applicable to U.S. public companies. These rules and regulations may increase our legal and financial compliance costs, which could adversely affect the trading price of our common stock.
We have identified a material weakness in our internal control over financial reporting which existed as of October 31, 2020. If we fail to properly remediate this or any future weaknesses or fail to maintain effective internal controls, there could be an adverse impact on our operations or the market price of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on Form 10-K our assessment of the effectiveness of our internal control over financial reporting. As of October 31, 2020, a material weakness was detected related to an acquired foreign subsidiary in the first year the subsidiary was included in management's evaluation of the effectiveness of the Company's internal control over financial reporting. We are actively engaged in remediation activities designed to address the material weakness, but our remediation efforts are not complete and are ongoing. There can be no assurance that we will be able to implement fully our plan and controls to address this material weakness or that the plan and controls, if implemented, will be successful in remediating this material weakness. In addition, we may in the future identify further material weaknesses in our internal control over financial reporting that we have not discovered to date. If we cannot adequately maintain the effectiveness of our internal control over financial reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results, cause investors to lose confidence in the reliability of our financial statements and result in a decrease in the value of our common stock.
Item 1B. Unresolved Staff Comments
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None.
Item 2. Properties
Real Estate
We own our corporate headquarters in Santa Paula, California. We own approximately 8,300 acres of farm land in California, with approximately 4,000 acres located in Ventura County, approximately 3,600 acres located in Tulare County in the San Joaquin Valley and approximately 700 acres in San Luis Obispo County. Additionally, we own approximately 1,300 acres located in Yuma, Arizona, 3,500 acres in La Serena, Chile and 1,200 acres in Jujuy, Argentina. In California, we lease approximately 30 acres of land located in Ventura County, approximately 80 acres in Tulare County and approximately 800 acres in San Bernardino County, and in Arizona, we lease approximately 65 acres of land located in Yuma County. We also have an interest in a partnership that owns approximately 200 acres of land in Ventura County. The land used for agricultural plantings consists of approximately 6,000 acres of lemons, approximately 900 acres of avocados, approximately 1,400 acres of oranges and approximately 900 acres of specialty citrus and other crops. Our agribusiness land holdings are summarized below as of October 31, 2020 (in thousands, except per acre amounts):
Ranch Name Acres Book Value Acquisition Date Book Valueper Acre
The book value of our agribusiness land holdings of approximately $89.5 million differs from the land balance of $96.3 million included in property, plant and equipment in the notes to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K. The table above presents our current land holdings in farming agribusiness operations and, therefore, excludes Oxnard Lemon land, rental and real estate development land.
We own our packing facilities located in Santa Paula and Oxnard, California and Yuma, Arizona, where we process and pack our lemons as well as lemons for other growers. We commissioned a new lemon packing facility in 2016 to increase capacity and efficiency of our lemon packing operations. We have a 5.5 acre, one-megawatt ground-based photovoltaic solar generator, which provides the majority of the power to operate our packing facility. We also have a one-megawatt solar array that provides us with a majority of the electricity required to operate four deep water well pumps at one of our ranches in the San Joaquin Valley.
We own 256 residential units in Ventura and Tulare Counties that we lease to our employees, former employees and outside tenants and we own several commercial office buildings and properties that are leased to various tenants.
We own real estate development property in the California counties of Santa Barbara and Ventura. These properties are in various stages of development for up to approximately 1,500 residential units and approximately 811,000 square feet of commercial space.
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Water and Mineral Rights
Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. We believe we have adequate supplies of water for our agribusiness segments as well as our rental and real estate development activities. Water for our farming operations located in Ventura County, California is sourced from the existing water resources associated with our land, which includes approximately 8,600 acre-feet of adjudicated water rights in the Santa Paula Basin (aquifer) and the un-adjudicated Fillmore Basin. We use a combination of ground water provided by wells that derive water from the San Joaquin Valley Basin and water from various water districts and irrigation districts in Tulare County, California, which is in the agriculturally productive San Joaquin Valley. We use ground water provided by wells that derive water from the Cadiz Valley Basin at the Cadiz Ranch in San Bernardino County, California. Our Windfall Farms property located in San Luis Obispo County, California obtains water from wells that derive water from the Paso Robles Basin. Our Associated farming operations in Yuma, Arizona source water from the Colorado River through the YMIDD, where we have access to approximately 11,700 acre feet of Class 3 Colorado River water rights. We also have acquired water rights in Chile from our acquisitions of PDA and San Pablo.
Our rights to extract groundwater from the Santa Paula Basin are governed by the Santa Paula Basin Judgment (the “Judgment”). The Judgment was entered into in 1996 by stipulation among the United Water Conservation District, the City of Ventura and various members of the Santa Paula Basin Pumpers Association (the “Association”). The Association is a not-for-profit, mutual benefit corporation, which represents the interests of all overlying landowners with rights to extract groundwater from the Santa Paula Basin and the City of Santa Paula. We are a member of the Association. Membership in the Association is governed by the Association's Bylaws.
The Judgment adjudicated and allocated water rights in the Santa Paula Basin among the Association's members and the City of Ventura. The water rights are established and governed by a seven-year moving average (i.e., production can rise or fall in any particular year so long as the seven-year average is not exceeded). Under California law, the water rights are considered "property". A perpetual right to water, evidenced by the Judgment, can be exchanged for interests in real property under IRS Code Section 1031 and if condemned by a public agency, just compensation must be paid to the rightful owner. Our rights under the Judgment are perpetual and considered very firm and reliable which reflects favorably upon their fair market value.
For ease of administration, the Association is appointed by the Judgment as the trustee of its members’ water rights and is responsible for coordinating and promoting the interests of its members. The Judgment includes provisions for staged reductions in production rights should shortage conditions develop. It also allows the adjudicated water rights to be leased or sold among the parties. The Judgment established a Technical Advisory Committee composed of the United Water Conservation District, the City of Ventura and the Association to assist the Superior Court of the State of California, Ventura County (the “Court”), with the technical aspects of Santa Paula Basin management. Finally, the Judgment reserves continuing jurisdiction to the Court to hear motions for enforcement or modification of the Judgment as necessary.
Our California water resources include approximately 17,000 acre-feet of water affiliated with our owned properties, of which approximately 8,600 acre-feet are adjudicated. Our Yuma, Arizona water resources include approximately 11,700 acre-feet of water sourced from the Colorado River. We own shares in five not-for-profit mutual benefit water companies. Our investments in these water companies provide us with the right to receive a proportionate share of water from each of the water companies.
We believe water is a natural resource that is critical to economic growth in the western United States and firm, reliable water rights are essential to our sustainable business practices. Consequently, we have long been a private steward and advocate of prudent and efficient water management. We have made substantial investments in securing water and water rights in quantities that are sufficient to support and, we believe will exceed, our long-term business objectives. We strive to follow best management practices for the diversion, conveyance, distribution and use of water. In the future, we intend to continue to provide leadership in the area of, and seek innovation opportunities that promote increased water use efficiency and the development of new sources of supply for our neighboring communities.
Item 3. Legal Proceedings
We are from time to time involved in legal proceedings arising in the normal course of business. Other than proceedings incidental to our business, we are not a party to, nor is any of our property the subject of, any material pending legal proceedings, and no such proceedings are, to our knowledge, contemplated by governmental authorities.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on The NASDAQ Stock Market LLC (“NASDAQ”) under the symbol “LMNR.” There is no assurance that our common stock will continue to be traded on NASDAQ or that any liquidity will exist for our stockholders.
Holders
On December 31, 2020, there were approximately 214 registered holders of our common stock. The number of registered holders includes banks and brokers who act as nominees, each of whom may represent more than one stockholder.
Dividends
The following table presents cash dividends per common share declared and paid in the periods shown.
Dividend
In December 2020, we declared our quarterly dividend of $0.0750 per common share and we expect to continue to pay quarterly dividends at a similar rate to the extent permitted by the financial results of our business and other factors beyond management’s control.
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Performance Graph
The line graph above compares the percentage change in cumulative total stockholder return of our common stock registered under section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with (i) the cumulative total return of the Russell 2000 Index, assuming reinvestment of dividends, and (ii) the cumulative total return of Dow Jones U.S. Food Producers Index, assuming reinvestment of dividends.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
During the fourth quarter of fiscal year 2020, we purchased shares of our common stock as follows:
(1) We did not acquire any shares from our employees in accordance with our stock-based compensation plan.
(2) On March 12, 2020, the Board of Directors of our Company approved a share repurchase program authorizing us to repurchase up to $10.0 million of our outstanding shares of common stock through March 2021.
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Item 6. Selected Financial Data
The following selected financial data are derived from our audited consolidated financial statements. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations,” the financial statements and related notes to consolidated financial statements included elsewhere in this Annual Report (in thousands, except per share amounts).
Fiscal Years Ended October 31,
Basic net (loss) income per common share $ (0.96) $ (0.37) $ 1.26 $ 0.42 $ 0.52
In fiscal year 2020, we sold our remaining 200,000 shares of Calavo common stock at an average price of $55.29 per share, the net proceeds from the sale were $11.0 million. In March 2020, the CARES Act was signed into law. We have recorded approximately $1.9 million of income tax benefit and $6.7 million federal and California refunds in fiscal years 2020 and 2021. In March 2020, the Board of Directors of our Company approved a share repurchase program authorizing us to repurchase up to $10.0 million of our outstanding shares of common stock through March 2021. During 2020, we repurchased 250,977 shares under the share repurchase program for approximately $3.5 million.
In fiscal year 2019, revenues increased $14.7 million as a result of the Trapani Fresh acquisition and by $8.8 million with the adoption of FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In December 2018, we terminated our lease agreement with the Joint Venture who is developing the East Area I real estate development project. As a result, we reduced our sale lease-back deferral and corresponding real estate development by $58.3 million and reclassified $33.4 million of our basis in the Joint Venture from real estate development to equity in investments and contributed $4.0 million to the Joint Venture. In May 2019, we acquired a 51% interest in a joint venture, Trapani Fresh, formed with FGF Trapani, a multi-generational, family owned citrus operation in Argentina for $15.0 million, which is consolidated.
In June 2018, we completed the sale of 3,136,000 shares of common stock, at a price of $22.00 per share, to institutional and other investors in a registered offering under our shelf registration statement. The gross proceeds of the offering totaled $69.0 million and after an underwriting discount of $4.5 million and other offering expenses of $0.4 million, the net proceeds were $64.1 million. In June and July 2018, we used the offering proceeds to pay down debt, purchase San Pablo ranch for $13.1 million and purchase Oxnard Lemon packinghouse, related land and certain other assets for $25.0 million. In fiscal year 2018, we capitalized approximately $32.7 million of costs related to our East Areas I & II real estate development projects and we contributed $3.5 million to the Joint Venture for our East Area I real estate development project.
In fiscal year 2017, we completed the acquisition of 90% of the outstanding stock of PDA, a privately-owned Chilean corporation, for $5.7 million in cash. PDA also had approximately $1.7 million in long term debt on the acquisition date, which we assumed in the acquisition. We capitalized approximately $7.9 million of costs related to our East Areas I & II real estate development projects, $5.2 million of costs related to orchard development and $1.9 million of costs related to vineyard development. Additionally, we contributed $7.5 million to the Joint Venture for our East Area I real estate development project.
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COVID-19 Pandemic
The global spread of the novel coronavirus ("COVID-19") in recent months has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The impact of this pandemic has created significant uncertainty in the global economy and has affected our business, employees, suppliers, and customers.
The COVID-19 pandemic has had an adverse impact on the industries and markets in which we conduct business. In particular, the United States lemon market has seen a significant decline in volume, with lemon demand falling since wide spread shelter in place orders were issued in mid-March, resulting in a significant market oversupply. The export market for fresh product has also significantly declined due to COVID-19 impacts.
The decline in demand for our products beginning the second quarter of 2020, which we believe was a result of the COVID-19 pandemic, negatively impacted our sales and profitability for the second and third quarters of 2020. We also expect an adverse impact on our sales and profitability in future periods. These impacts are expected to be material. However, the duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors, many of which are outside management’s control, including those presented in - Item 1A. Risk Factors of this Annual Report. Although subject to unforeseen changes that may arise as the COVID-19 pandemic continues to unfold, we currently expect improvement into fiscal year 2021, specifically as restaurants and bars reopen.
We took proactive actions early on to protect the health of our employees and their families, including curtailing business travel and encouraging video conferencing whenever possible. In addition, as the COVID-19 pandemic worsened throughout March and into April and May 2020, we allowed personnel to work remotely to the extent possible. While we believe we have taken appropriate measures to mitigate the impacts of the COVID-19 pandemic, as the situation evolves into what could be a more prolonged pandemic, we will continue to analyze additional mitigation measures that may be needed to preserve the health and safety of our workforce and our customers and the ongoing continuity of our business operations. Those measures might include modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, or such other industry best practices needed to continue to maintain a healthy and safe environment for our employees amidst the COVID-19 pandemic.
Given the economic uncertainty as a result of the COVID-19 pandemic, we have taken actions to improve our current liquidity position, including temporarily postponing capital expenditures, selling equity securities to increase cash, reducing operating costs, and substantially reducing discretionary spending.
We are one of the largest growers of lemons and avocados in the United States and maintain our country's food chain infrastructure and thus are considered an essential business and permitted to remain open during the ongoing pandemic, be it at reduced volumes, in order to fulfill our customers' needs. However, there is significant uncertainty around the breadth and duration of our business disruptions related to the COVID-19 pandemic, as well as its impact on the U.S. economy, the ongoing business operations of our clients and our results of operations and financial condition. While our management team is actively monitoring the impacts of the COVID-19 pandemic and may take further actions altering our business operations that we determine are in the best interests of our employees and clients or as required by federal, state, or local authorities, the full impact of the COVID-19 pandemic on our results
of operations, financial condition, or liquidity cannot be fully estimated at this point. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Financial Data” and our consolidated financial statements and notes thereto that appear elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under “Risk Factors” included in Item 1A and elsewhere in this Annual Report.
Overview
Limoneira Company was incorporated in Delaware in 1990 as the successor to several businesses with operations in California since 1893. We are primarily an agribusiness company founded and based in Santa Paula, California, committed to responsibly using and managing our approximately 15,400 acres of land, water resources and other assets to maximize long-term stockholder value. Our current operations consist of fruit production, sales and marketing, rental operations, real estate and capital investment activities.
We are one of California’s oldest citrus growers. According to Sunkist, we are one of the largest growers of lemons in the United States and, according to the California Avocado Commission, one of the largest growers of avocados in the United States. In addition to growing lemons and avocados, we grow oranges and a variety of specialty citrus and other crops. We have agricultural plantings throughout Ventura, Tulare, San Luis Obispo and San Bernardino Counties in California, Yuma County in Arizona, La Serena, Chile, and Jujuy, Argentina, which collectively consist of approximately 6,000 acres of lemons, 900 acres of avocados, 1,400 acres of oranges and 900 acres of specialty citrus and other crops. We also operate our own packinghouses in Santa Paula and Oxnard, California and Yuma, Arizona, where we process, pack and sell lemons that we grow, as well as lemons grown by others. We have a 47% interest in Rosales, a citrus packing, marketing and sales business, a 90% interest in Fruticola Pan de Azucar S.A. (“PDA”), a lemon and orange orchard and 100% interest in San Pablo, a lemon and orange orchard, all of which are located near La Serena, Chile. We have a 51% interest in a joint venture, Trapani Fresh, a lemon growing, packing, marketing and selling business in Argentina.
Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water from the San Joaquin Valley Basin and water from water districts and irrigation districts in Tulare County, which is in California’s San Joaquin Valley. We also use ground water from the Cadiz Valley Basin in California's San Bernardino County and surface water in Arizona from the Colorado River through the Yuma Mesa Irrigation and Drainage District. We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in Chile and our Trapani Fresh farming operations in Argentina.
For more than 100 years, we have been making strategic investments in California agriculture and real estate. We currently have an interest in three real estate development projects in California. These projects include multi-family housing and single-family homes comprised of 256 completed rental units and another approximately 1,150 units in various stages of planning and development.
We have three business divisions: agribusiness, rental operations and real estate development. Our agribusiness division is comprised of four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness, and includes our core operations of farming, harvesting, lemon packing and lemon sales operations. The rental operations division includes our residential and commercial rentals, leased land operations and organic recycling. The real estate development division includes our investments in real estate development projects. Generally, we see our Company as a land and farming company that generates annual cash flows to support our progress into diversified real estate development activities. As real estate developments are monetized, our agriculture business will then be able to expand more rapidly into new regions and markets.
Recent Developments – Refer to Part I, Item 1 “Fiscal Year 2020 Highlights and Recent Developments”
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Results of Operations
The following table shows the results of operations for ($ in thousands):
Years Ended October 31,
Revenues:
Costs and expenses:
Impairment of real estate development assets — — — — 1,558 1%
Loss (gain) on sale and disposal of property assets 502 — (1,069) (1)% — —
Operating (loss) income:
Loss (gain) on sale and disposal of property assets (502) 1,069 —
Other (expense) income:
Equity in earnings of investments, net 339 3,073 583
(Loss) gain on stock in Calavo Growers, Inc. (6,299) (2,117) 4,223
(Loss) income before income tax benefit (provision) (26,435) (6,563) 13,483
Loss (income) attributable to noncontrolling interest 1,506 (477) (24)
Non-GAAP Financial Measures
Due to significant depreciable assets associated with the nature of our operations and interest costs associated with our capital structure, management believes that earnings before interest, income taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA, which excludes loss on stock in Calavo, LLCB earnings in equity investment, sale and disposal of property assets and impairments on real estate development assets when applicable, is an important measure to evaluate our results of operations between periods on a more comparable basis. Such measurements are not prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should not be construed as an alternative to reported results determined in accordance with GAAP. The non-GAAP information provided is unique to us and may not be consistent with methodologies used by other companies. EBITDA and adjusted EBITDA are summarized and reconciled to net income attributable to Limoneira Company which management considers to be the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands):
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Years Ended October 31,
Loss on stock in Calavo Growers, Inc. 6,299 2,054 —
LLCB earnings in equity investments, net (326) (2,870) —
Loss (gain) on sale and disposal of property assets 502 (991) —
Impairment of real estate development assets — — 1,558
Fiscal Year 2020 Compared to Fiscal Year 2019
Revenues
Total revenues for fiscal year 2020 was $164.6 million compared to $171.4 million for fiscal year 2019. The 4% decrease of $6.8 million was primarily the result of decreased lemons agribusiness revenues, as detailed below ($ in thousands):
Agribusiness Revenues for the Years Ended October 31,
•Lemons: The decrease in fiscal year 2020 was primarily the result of lower prices partially offset by higher volume of fresh lemons sold compared to fiscal year 2019. During fiscal years 2020 and 2019, fresh lemon sales were $101.1 million and $110.1 million on 5.5 million and 5.2 million cartons of fresh lemons sold at average per carton prices of $18.32 and $21.00, respectively. COVID-19 related food service closures reduced the demand for lemons in the food service marketplace and created an over-supply in the retail marketplace. This oversupply of lemons resulted in lower average per carton prices in fiscal year 2020 compared to fiscal year 2019. Lemon revenues in fiscal years 2020 and 2019 included $13.4 million and $15.6 million shipping and handling, $4.1 million and $10.8 million lemon by-products and $18.9 million and $13.5 million other lemon sales, respectively.
•Avocados: The increase in fiscal year 2020 was primarily the result of higher volume partially offset by lower prices of avocados sold compared to fiscal year 2019. The California avocado crop typically experiences alternating years of high and low production due to plant physiology. During fiscal years 2020 and 2019, 8.0 million and 1.8 million pounds of avocados were sold at average per pound prices of $1.10 and $1.72, respectively. Lower prices in fiscal year 2020 were primarily related to higher supply of fruit in the marketplace. Fiscal year 2019 avocados revenues included approximately $2.3 million of crop insurance.
•Oranges: The increase in fiscal year 2020 was primarily due to higher prices partially offset by lower volume of oranges sold compared to fiscal year 2019. During fiscal years 2020 and 2019, sales consisted of 743,000 and 907,000 40-pound carton equivalents of oranges sold at average per carton prices of $10.39 and $6.64, respectively.
•Specialty citrus and other crops: The increase in fiscal year 2020 was primarily the result of higher prices partially offset by lower volume of specialty citrus sold compared to fiscal year 2019. In fiscal years 2020 and 2019, we sold 333,000 and 358,000 40-pound carton equivalents of specialty citrus at an average per carton price of $12.37 and $9.34, respectively.
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Rental operations revenue was $4.6 million in fiscal year 2020 compared to $4.8 million in fiscal year 2019. The decrease in fiscal year 2020 was primarily due to decreased revenues from residential rental units leased to employees, former employees and non-employees compared to fiscal year 2019.
Real estate development revenue was zero in both fiscal years 2020 and 2019.
Costs and Expenses
Total costs and expenses for fiscal year 2020 were $183.6 million compared to $176.9 million for fiscal year 2019. This 4% increase of $6.7 million was primarily attributable to increases in our agribusiness expenses. Costs associated with our agribusiness division include packing costs, harvest costs, growing costs, costs related to the lemons we procure from third-party growers and depreciation and amortization expense. These costs are discussed further below ($ in thousands):
Agribusiness Costs and Expenses for the Years Ended October 31,
•Packing costs: Packing costs consist of the costs to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. Lemon packing costs were $42.6 million and $37.7 million in fiscal years 2020 and 2019, respectively. The increase in fiscal year 2020 was primarily attributable to higher average per carton costs and higher volume of fresh lemons packed and sold compared to fiscal year 2019. In fiscal years 2020 and 2019, we packed and sold 5.5 million and 5.2 million cartons of lemons at average per carton costs of $7.71 and $7.20, respectively. The increase in average per carton costs in fiscal year 2020 compared to fiscal year 2019 was primarily due to decreased percentage of the crop that went to the fresh market. Additionally, in fiscal years 2020 and 2019, packing costs included $3.0 million and $3.2 million of shipping costs.
•Harvest costs: The increase in fiscal year 2020 was primarily attributable to increased volume of lemons and avocados harvested partially offset by decreased volume of oranges harvested compared to fiscal year 2019.
•Growing costs: Growing costs, also referred to as cultural costs, consist of orchard maintenance costs such as cultivation, fertilization and soil amendments, pest control, pruning and irrigation. The increase in fiscal year 2020 was primarily due to net increased costs for cultivation compared to fiscal year 2019. These net increases reflect farm management decisions based on weather, harvest timing and crop conditions.
•Third-party grower costs: We sell lemons that we grow and lemons that we procure from other growers. The cost of procuring lemons from other growers is referred to as third-party grower costs. The decrease in fiscal year 2020 was primarily due to lower prices of third-party grower lemons sold, partially offset by increased volume compared to fiscal year 2019. During fiscal years 2020 and 2019, of the 5.5 million and 5.2 million cartons sold, 3.3 million (60%) and 3.1 million (60%) were procured from third-party growers at average per carton prices of $11.71 and $15.52, respectively. Additionally, in fiscal years 2020 and 2019 we incurred $15.5 million and $9.0 million, respectively of costs for purchased, packed fruit for resale.
•Depreciation and amortization expense in fiscal year 2020 was $1.3 million higher than fiscal year 2019 primarily due to the acquisition of Trapani Fresh in May 2019.
Other operations expenses were $4.5 million in the fiscal year 2020 compared to $4.4 million in the fiscal year 2019.
Loss (gain) on sales of property assets for fiscal years 2020 and 2019 were $0.5 million and $(1.1) million, respectively.
Selling, general and administrative expenses for fiscal year 2020 were $21.3 million compared to $21.2 million for fiscal year 2019. This 1% increase of $0.1 million was primarily attributable to the following:
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•$0.9 million increase in training, depreciation and other costs associated with an ERP implementation; and
•$0.8 million decrease in other selling, general and administrative expenses, including certain corporate overhead expenses.
Other (Expense) Income
Other (expense) income, for fiscal year 2020 was $(7.4) million compared to $(1.0) million for fiscal year 2019. The $6.4 million increase in expense is primarily the result of:
•$0.3 million decrease in interest expense as a result of lower interest rates;
•$2.7 million decrease in equity in earnings of investments primarily from LLCB; and
•$4.2 million increase in the loss on sales of stock in Calavo.
Income Taxes
We recorded an income tax benefit of $8.5 million for fiscal year 2020 on pre-tax loss of $26.4 million compared to an income tax benefit of $1.1 million for fiscal year 2019 on pre-tax loss of $6.6 million. The tax provision recorded for the fiscal year 2020 differs from the U.S. federal statutory tax rate of 21% due primarily to a $1.9 million discrete benefit related to the CARES Act. Our effective tax rate for fiscal years 2020 and 2019 was 32.2% and 17.1%, respectively.
Net (Loss) Income Attributable to Noncontrolling Interest
Net (loss) income attributable to noncontrolling interest primarily represents 10% of the net income of PDA and 49% of the net loss of Trapani Fresh.
Fiscal Year 2019 Compared to Fiscal Year 2018
Revenues
Total revenues for fiscal year 2019 was $171.4 million compared to $129.4 million for fiscal year 2018. The 32% increase of $42.0 million was primarily the result of increased agribusiness revenues, as detailed below ($ in thousands):
Agribusiness Revenues for the Years Ended October 31,
•Lemons: The increase in fiscal year 2019 was primarily the result of higher volume partially offset by lower prices of fresh lemons sold compared to fiscal year 2018. A portion of the increased revenue was the result of fresh lemon sales of $14.7 million by Trapani Fresh on 746,000 cartons of fresh lemons sold in fiscal year 2019. During fiscal years 2019 and 2018, fresh lemon sales were $110.1 million and $83.9 million on 5.2 million and 3.3 million cartons of fresh lemons sold at average per carton prices of $21.00 and $25.42, respectively. Lemon revenues in fiscal year 2019 included $15.6 million shipping and handling, $10.8 million lemon by-products and $13.5 million other lemon sales. Other lemon sales in fiscal year 2019 included $2.9 million of lemon sales in Chile by PDA and San Pablo and $9.5 million of brokered fruit sales, of which $8.8 million is due to the adoption of FASB ASU 2014-19. Lemon revenues in fiscal year 2018 included $9.0 million shipping and handling, $4.4 million lemon by-products and $6.5 million other lemon sales. Other lemon sales in fiscal year 2018 included $2.3 million of lemon sales in Chile by PDA and $1.1 million of commissions earned on 912,000 cartons of brokered fruit sales.
•Avocados: The decrease in fiscal year 2019 was the result of lower volume partially offset by higher prices of avocados sold compared to fiscal year 2018. The California avocado crop typically experiences alternating years of high and low production due to plant physiology. During fiscal years 2019 and 2018, 1.8 million and 6.3 million pounds of avocados were sold at average per pound prices of $1.72 and $1.04, respectively. Higher prices in fiscal year 2019 were primarily related to lower supply of fruit in the marketplace. Fiscal year 2019 avocados revenues included approximately $2.3 million of crop insurance.
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•Oranges: The decrease in fiscal year 2019 was primarily due to lower prices partially offset by higher volume of oranges sold compared to fiscal year 2018. During fiscal years 2019 and 2018, sales consisted of 907,000 and 712,000 40-pound carton equivalents of oranges sold at average per carton prices of $6.64 and $12.48, respectively. Oranges revenues in fiscal years 2019 and 2018 included $0.3 million of orange sales in Chile.
•Specialty citrus and other crops: The slight increase in fiscal year 2019 was primarily the result of higher volume of wine grapes and pistachios sold offset by lower specialty citrus revenues compared to fiscal year 2018. In fiscal year 2019, we sold approximately 1,300 tons of wine grapes for $1.3 million compared to approximately 600 tons of wine grapes for $0.9 million in fiscal year 2018.
Corporate and other operations revenue was $4.8 million in fiscal year 2019 compared to $5.0 million in fiscal year 2018. The decrease in fiscal year 2019 was primarily due to decreased revenues from land leased to third-party agricultural tenants compared to fiscal year 2018.
Costs and Expenses
Total costs and expenses for fiscal year 2019 were $176.9 million compared to $119.9 million for fiscal year 2018. This 48% increase of $57.0 million was primarily attributable to increases in our agribusiness, real estate development and selling, general and administrative costs and expenses. Costs associated with our agribusiness division include packing costs, harvest costs, growing costs, costs related to the lemons we procure from third-party growers and depreciation and amortization expense. These costs are discussed further below ($ in thousands):
Agribusiness Costs and Expenses for the Years Ended October 31,
•Packing costs: Packing costs consist of the costs to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. Lemon packing costs were $37.7 million and $21.4 million in fiscal years 2019 and 2018, respectively. The increase in fiscal year 2019 was primarily attributable to higher average per carton costs and higher volume of fresh lemons packed and sold compared to fiscal year 2018. In fiscal year 2019, we packed and sold 5.2 million cartons of lemons at average per carton costs of $7.20 compared to 3.3 million cartons of lemons sold at average per carton costs of $6.48 in fiscal year 2018. The increase in average per carton costs in fiscal year 2019 compared to fiscal year 2018 is primarily due to increased volume of lemon by-products and $5.8 million of operating costs incurred at the Oxnard Lemon facility. Additionally, packing costs included $3.2 million of shipping costs in fiscal year 2019 compared to $1.7 million in fiscal year 2018.
•Harvest costs: The increase in fiscal year 2019 was primarily attributable to increased volume of lemons and Navel oranges and specialty citrus harvested partially offset by decreased volume of avocados harvested compared to fiscal year 2018.
•Growing costs: Growing costs, also referred to as cultural costs, consist of orchard maintenance costs such as cultivation, fertilization and soil amendments, pest control, pruning and irrigation. The increase in fiscal year 2019 is primarily due to net increased costs for fertilization and soil amendments and pruning in addition to San Pablo and Trapani Fresh growing costs compared to fiscal year 2018. These net increases reflect farm management decisions based on weather, harvest timing and crop conditions.
•Third-party grower costs: We sell lemons that we grow and lemons that we procure from other growers. The cost of procuring lemons from other growers is referred to as third-party grower costs. The increase is primarily due to higher volume of third-party grower lemons sold. During fiscal years 2019 and 2018, of the 5.2 million and 3.3 million cartons sold, 3.1 million (60%) and 1.5 million (45%) were procured from third-party growers at average per carton prices of $15.52 and $20.89, respectively.
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Additionally, in fiscal year 2019 we incurred $9.0 million of costs for purchased, packed fruit for resale compared to $0.4 million in fiscal year 2018.
•Depreciation and amortization expense in fiscal year 2019 was $1.4 million higher than fiscal year 2018 primarily due to the acquisitions of San Pablo, Oxnard Lemon and Trapani Fresh and an increase in assets placed into service.
Real estate development expenses for fiscal year 2019 were $0.1 million compared to $1.7 million in fiscal year 2018. Real estate development costs and expenses in fiscal year 2018 include $1.6 million impairment on Pacific Crest and Sevilla real estate development projects. Gain on sales of property for fiscal year 2019 includes $1.1 million for the sale of two properties.
Selling, general and administrative expenses for fiscal year 2019 were $21.2 million compared to $16.1 million for fiscal year 2018. This 32% increase of $5.1 million was primarily attributable to the following:
•$3.2 million in Trapani Fresh selling, general and administrative expenses;
•$0.8 million increase in legal, consulting and other administrative expenses primarily associated with our acquisition of Trapani Fresh in May 2019;
•$0.4 million increase in lemon selling expenses primarily due to an increase in personnel; and
•$0.7 million increase in other selling, general and administrative expenses, including certain corporate overhead expenses.
Other (Expense) Income
Other (expense) income, for fiscal year 2019 was ($1.0) million of expense compared to $4.0 million of income for fiscal year 2018. The $5.0 million decrease in income is primarily the result of:
•$1.0 million increase in interest expense as a result of higher debt;
•$2.5 million increase in equity in earnings of investments primarily from LLCB;
•$4.3 million decrease in the gain on sales of stock in Calavo; and
•$2.1 million in unrealized loss on stock in Calavo in fiscal year 2019.
Income Taxes
We recorded an income tax benefit of $1.1 million for fiscal year 2019 on pre-tax loss of $6.6 million compared to an income tax benefit of $6.7 million for fiscal year 2018 on pre-tax income of $13.5 million. Our effective tax rate was 17.1% for fiscal year 2019 compared to an effective tax rate of (49.9)% for fiscal year 2018. Our effective tax rate in fiscal year 2018 was primarily due to the approximate $10.3 million decrease in deferred tax liabilities related to the change in the federal tax rate from the Tax Cuts and Jobs Act of 2017. No such tax rate changes occurred in fiscal year 2019.
Net (Loss) Income Attributable to Noncontrolling Interest
Net (loss) income attributable to noncontrolling interest primarily represents 10% of the net income of PDA and 49% of the net income of Trapani Fresh.
Segment Results of Operations
We operate in four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness. Our reportable operating segments are strategic business units with different products and services, distribution processes and customer bases. We evaluate the performance of our operating segments separately to monitor the different factors affecting financial results. Each segment is subject to review and evaluations related to current market conditions, market opportunities and available resources. See Note 22 - Segment Information of the notes to consolidated financial statements included in this Annual Report for additional information regarding our operating segments.
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Segment information for fiscal year 2020 (in thousands):
Segment information for fiscal year 2019 (in thousands):
Segment information for fiscal year 2018 (in thousands):
Fiscal Year 2020 Compared to Fiscal Year 2019
The following analysis should be read in conjunction with the previous section “Results of Operations.”
Fresh Lemons
Fresh lemons segment revenue is comprised of sales of fresh lemons, lemon by-products and other lemon revenue such as purchased, packed fruit for resale. For fiscal year 2020, our fresh lemons segment revenue was $124.2 million compared to $134.3 million for fiscal year 2019. The 8% decrease of $10.2 million was primarily the result of lower prices partially offset by higher volume of fresh lemons sold, as discussed earlier.
Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs, cost of fruit we procure from third-party growers, transportation costs and packing service charges incurred from the lemon packing segment to pack lemons for sale. For fiscal year 2020, our fresh lemon costs and expenses were $125.3 million compared to $121.0 million for fiscal year 2019. The 4% increase of $4.3 million primarily consisted of the following:
•Harvest costs for fiscal year 2020 were $0.7 million higher than fiscal year 2019.
•Growing costs for fiscal year 2020 were $2.3 million higher than fiscal year 2019.
•Third-party grower costs for fiscal year 2020 were $5.2 million lower than fiscal year 2019.
•Transportation costs for fiscal year 2020 were $0.2 million lower than fiscal year 2019.
•Intersegment costs and expenses for fiscal year 2020 were $6.7 million higher than fiscal year 2019.
Lemon Packing
Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For fiscal year 2020, our lemon packing segment revenue was $50.2 million compared to $45.7 million for fiscal year 2019. The 10% increase of $4.5 million was primarily due to increased volume of lemons packed and sold.
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Costs and expenses associated with our lemon packing segment consist of the cost to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. For fiscal year 2020, our lemon packing costs and expenses were $42.6 million compared to $37.6 million for fiscal year 2019. The 13% increase of $4.9 million was primarily due to increased volume of lemons packed and decreased fresh utilization.
Lemon packing segment operating income per carton sold was $1.39 and $1.54 for fiscal years 2020 and 2019, respectively.
The lemon packing segment included $36.8 million and $30.1 million of intersegment revenues for fiscal years 2020 and 2019, respectively, that are charged to the fresh lemons segment to pack lemons for sale. Such intersegment revenues and expenses are eliminated in our consolidated financial statements.
Avocados
For fiscal year 2020, our avocados segment revenue was $8.8 million compared to $5.4 million for fiscal year 2019, a 63% increase of $3.4 million.
Cost and expenses associated with our avocados segment include harvest costs and growing costs. For fiscal year 2020, our avocado costs and expenses were $5.2 million compared to $3.2 million for fiscal year 2019. The 64% increase of $2.0 million primarily consists of the following:
•Harvest costs for fiscal year 2020 were $0.9 million higher than fiscal year 2019.
•Growing Costs for fiscal year 2020 were $1.2 million higher than fiscal year 2019.
Other Agribusiness
For fiscal year 2020, our other agribusiness segment revenue was $13.6 million compared to $11.2 million for fiscal year 2019. The 21% increase of $2.4 million primarily consisted of the following:
•Orange revenue in fiscal year 2020 was $1.7 million higher than fiscal year 2019.
•Specialty citrus and other crop revenue for fiscal year 2020 was $0.7 million higher than fiscal year 2019.
Costs and expenses associated with our other agribusiness segment include harvest, growing and purchased fruit costs. Our other agribusiness costs and expenses for fiscal year 2020 were $12.1 million compared to $13.0 million for fiscal year 2019. The 7% decrease of $0.9 million primarily consisted of the following:
•Harvest costs for fiscal year 2020 were $0.2 million lower than fiscal year 2019.
•Growing costs for fiscal year 2020 were $2.6 million lower than fiscal year 2019.
•Purchased fruit costs for fiscal year 2020 were $1.9 million higher than fiscal year 2019.
Fresh lemons, lemon packing, avocados and other agribusiness depreciation and amortization for fiscal year 2020 were $8.9 million compared to $7.6 million in fiscal year 2019. The 17% increase of $1.3 million was primarily due to the acquisition of Trapani Fresh and an increase in assets placed into service.
Corporate and Other
Our corporate and other segment had revenues of approximately $4.6 million and $4.8 million in fiscal years 2020 and 2019, respectively. The $0.2 million decrease in fiscal year 2020 was primarily due to decreased revenues from residential rental units leased to employees, former employees and non-employees compared to fiscal year 2019.
Costs and expenses in our corporate and other segment were approximately $25.1 million and $23.5 million in fiscal years 2020 and 2019, respectively. Depreciation expense was approximately $1.2 million and $1.0 million in fiscal years 2020 and 2019, respectively.
Additionally, loss (gain) on sales of property assets for fiscal years 2020 and 2019 were $0.5 million and $(1.1) million, respectively.
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Selling, general and administrative expenses
Selling, general and administrative expenses include corporate and other costs and expenses not allocated to the operating segments. Selling, general and administrative expenses for fiscal year 2020 were $0.1 million lower than fiscal year 2019.
Fiscal Year 2019 Compared to Fiscal Year 2018
The following analysis should be read in conjunction with the previous section “Results of Operations.”
Fresh Lemons
Fresh lemons segment revenue is comprised of sales of fresh lemons, lemon by-products and other lemon revenue such as purchased, packed fruit for resale. For fiscal year 2019, our fresh lemons segment revenue was $134.3 million compared to $94.8 million for fiscal year 2018, a 42% increase of $39.5 million, primarily the result of higher volume and Trapani Fresh revenue of fresh lemons sold, partially offset by lower prices of fresh lemons sold, as discussed earlier.
Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs, cost of fruit we procure from third-party growers and packing service charges incurred from the lemon packing segment to pack lemons for sale. For fiscal year 2019, our fresh lemon costs and expenses were $121.0 million compared to $74.8 million for fiscal year 2018. The 62% increase of $46.2 million primarily consisted of the following:
•Harvest costs for fiscal year 2019 were $5.6 million higher than fiscal year 2018.
•Growing costs for fiscal year 2019 were $1.3 million higher than fiscal year 2018.
•Third-party grower costs for fiscal year 2019 were $25.8 million higher than fiscal year 2018.
•Transportation costs for fiscal year 2019 were $3.3 million higher than fiscal year 2018.
•Intersegment costs and expenses for fiscal year 2019 were $10.1 million higher than fiscal year 2018.
Lemon Packing
Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For fiscal year 2019, our lemon packing segment revenue was $45.7 million compared to $29.0 million for fiscal year 2018, a 58% increase of $16.7 million primarily due to increased volume of lemons packed and increased shipping and handling revenues.
Costs and expenses associated with our lemon packing segment consist of the cost to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. For fiscal year 2019, our lemon packing costs and expenses were $37.6 million compared to $23.1 million for fiscal year 2018. The 63% increase of $14.6 million was primarily due to increased volume of lemons packed and increased shipping costs.
Lemon packing segment operating income per carton sold was $1.54 and $1.78 for fiscal years 2019 and 2018, respectively.
The lemon packing segment included $30.1 million and $20.0 million of intersegment revenues for fiscal years 2019 and 2018, respectively, that are charged to the fresh lemons segment to pack lemons for sale. Such intersegment revenues and expenses are eliminated in our consolidated financial statements.
Avocados
For fiscal year 2019, our avocados segment revenue was $5.4 million compared to $6.6 million for fiscal year 2018, an 18% decrease of $1.2 million.
Cost and expenses associated with our avocados segment include harvest costs and growing costs. For fiscal year 2019, our avocado costs and expenses were $3.2 million compared to $4.4 million for fiscal year 2018. The 28% decrease of $1.2 million primarily consists of the following:
•Harvest costs for fiscal year 2019 were $0.8 million lower than fiscal year 2018.
•Growing Costs for fiscal year 2019 were $0.5 million lower than fiscal year 2018.
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Other Agribusiness
For fiscal year 2019, our other agribusiness segment revenue was $11.2 million compared to $13.9 million for fiscal year 2018. The 20% decrease of $2.8 million primarily consisted of the following:
•Orange revenue in fiscal year 2019 was $2.9 million lower than fiscal year 2018.
•Specialty citrus and other crop revenue for fiscal year 2019 was $0.1 million higher than fiscal year 2018.
Costs and expenses associated with our other agribusiness segment include harvest and growing costs. Our other agribusiness costs and expenses for fiscal year 2019 were $13.0 million compared to $9.5 million for fiscal year 2018. The 37% increase of $3.5 million primarily consisted of the following:
•Harvest costs for fiscal year 2019 were $0.6 million higher than fiscal year 2018.
•Growing costs for fiscal year 2019 were $2.9 million higher than fiscal year 2018.
Fresh lemons, lemon packing, avocados and other agribusiness depreciation and amortization for fiscal year 2019 were $7.6 million compared to $6.2 million in fiscal year 2018. The 22% increase of $1.4 million was primarily due to the acquisitions of San Pablo, Oxnard Lemon and Trapani Fresh and an increase in assets placed into service.
Corporate and Other Operations
Our corporate and other operations segment had revenues of approximately $4.8 million and $5.0 million in fiscal years 2019 and 2018, respectively. The $0.2 million decrease in fiscal year 2019 was primarily due to decreased revenues from land leased to third-party agricultural tenants.
Costs and expenses in our corporate and other operations segment were approximately $23.5 million and $20.8 million in fiscal years 2019 and 2018, respectively. Depreciation expense was similar in fiscal year 2019 compared to fiscal year 2018 at $1.0 million.
We recorded no impairment charge in fiscal year 2019 compared to $1.6 million in fiscal year 2018. Additionally, in fiscal year 2019 we sold two properties and recognized a gain on sales of property of approximately $1.1 million.
Selling, general and administrative expenses
Selling, general and administrative expenses include corporate and other costs and expenses not allocated to the operating segments. Selling, general and administrative expenses for fiscal year 2019 were $5.1 million higher than fiscal year 2018.
Quarterly Results of Operations
The following table presents our operating results for each of the fiscal quarters in the periods ended October 31, 2020 and October 31, 2019, respectively (in thousands, except per share amounts). The information for each of these quarters is derived from our unaudited interim financial statements and should be read in conjunction with the audited consolidated financial statements included in this Annual Report. All necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present our unaudited quarterly results. As with any agribusiness enterprise, our agribusiness operations are highly seasonal in nature. The harvest and sale of our lemons, avocados, oranges and specialty citrus and other crops occurs in all quarters, but is generally more concentrated during the third quarter.
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Three Months Ended 2020
Statement of Operations Data: Oct. 31, Jul. 31, Apr. 30, Jan. 31,
(Income) loss attributable to noncontrolling interest 97 509 423 477
Net (loss) income per common share:
Number of shares used in per common share computations:
Three Months Ended 2019
Statement of Operations Data: Oct. 31, Jul. 31, Apr. 30, Jan. 31,
(Loss) income before income tax benefit (provision) (4,094) 64 3,904 (6,437)
Loss (income) attributable to noncontrolling interest 138 (593) (5) (17)
Net (loss) income per common share:
Number of shares used in per common share computations:
The following information compares our fourth quarter ended October 31, 2020 to the fourth quarter ended October 31, 2019. Information concerning comparisons of our first, second and third quarters can be found in our quarterly reports on Form 10-Q.
•Total revenues decreased $6.7 million in the three months ended October 31, 2020 compared to the three months ended October 31, 2019 primarily due to decreased lemon and orange crop revenues of $3.0 million and $1.7 million, respectively. In addition, avocado revenues decreased $1.8 million primarily due to $2.3 million insurance revenue received in fiscal year 2019. During the fourth quarter of fiscal years 2020 and 2019, we sold 787,000 and 793,000 cartons of fresh lemons, at an average per carton price of $17.00 and $21.46, respectively. The decrease in orange revenues in the fourth quarter of fiscal year 2020 compared to the fourth quarter of fiscal year 2019 was primarily due to lower brokered fruit sales. During the
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fourth quarter of fiscal year 2020, we sold 487,000 pounds of avocados at an average per pound price of $0.99, compared to no sales for the fourth quarter of fiscal year 2019.
•Total costs and expenses decreased $0.8 million in the three months ended October 31, 2020 compared to the three months ended October 31, 2019. Decreases in agribusiness costs and selling, general and administrative expenses of $1.7 million and $0.6 million, respectively were partially offset by the change in loss (gain) on the sale and disposal of property assets of $1.6 million. The decrease in agribusiness costs was primarily due to decreased harvest costs and cultural costs of $0.6 million and $1.3 million, respectively.
•Total other loss increased $0.1 million in the three months ended October 31, 2020 compared to the three months ended October 31, 2019.
•Income tax benefit increased $1.7 million in the three months ended October 31, 2020 compared to the three months ended October 31, 2019 primarily due to the increase in pre-tax loss of $6.1 million.
Liquidity and Capital Resources
Overview
Our liquidity and capital position fluctuates during the year depending on seasonal production cycles, weather events and demand for our products. Typically, our first and last fiscal quarters coincide with the fall and winter months during which we are growing crops that are harvested and sold in the spring and summer, which are our second and third quarters. To meet working capital demand and investment requirements of our agribusiness and real estate development divisions and to supplement operating cash flows, we utilize our revolving credit facility to fund agricultural inputs and farm management practices until sufficient returns from crops allow us to repay amounts borrowed. Raw materials needed to propagate the various crops grown by us consist primarily of fertilizer, herbicides, insecticides, fuel and water, all of which are readily available from local sources.
Cash Flows from Operating Activities
For the fiscal years ended October 31, 2020, 2019 and 2018, net cash (used in) provided by operating activities was $(11.3) million, $1.4 million and $18.4 million, respectively. The significant components of our cash flows provided by operating activities are as follows:
•Net (loss) income was $(17.9) million, $(5.5) million and $20.2 million for fiscal years 2020, 2019 and 2018, respectively. The components of net loss in fiscal year 2020 compared to fiscal year 2019 consist of an increase in operating loss of $13.5 million, an increase in total other expense of $6.4 million and an increase in income tax benefit of $7.4 million. The components of net income in fiscal 2019 compared to fiscal year 2018 consist of a decrease in operating income of $15.0 million, an increase in total other expense of $5.0 million and a decrease in income tax benefit of $5.6 million.
•The adjustments to reconcile net (loss) income to net cash (used in) provided from operating activities provided $17.6 million of cash in fiscal year 2020 compared to providing $7.6 million of cash in fiscal year 2019, primarily due to significant changes in depreciation and amortization, loss on stock in Calavo and equity in earnings of investments. The adjustments to reconcile net (loss) income to net cash provided from operating activities provided $7.6 million of cash in fiscal year 2019 compared to using $1.3 million of cash in fiscal year 2018 primarily due to an increase in loss (gain) on sale and disposals of property assets, a decrease in deferred taxes and an increase in loss on stock in Calavo.
•The changes in operating assets and liabilities, net of business combinations used $11.0 million of operating cash in fiscal year 2020 compared to using $0.8 million of operating cash in fiscal year 2019, primarily due to significant changes in accounts receivable, prepaid expenses and other current assets, income tax receivable, accounts payable and growers payable and accrued liabilities. The changes in operating assets and liabilities, net of business combinations used $0.8 million of operating cash in fiscal year 2019 compared to using $0.5 million of operating cash in fiscal year 2018, primarily due to a decrease in cultural costs, an increase in prepaid expenses and other current assets, a net increase in accounts and growers payable and a decrease in accrued liabilities.
Cash Flows from Investing Activities
For the years ended October 31, 2020, 2019 and 2018, net cash provided by (used in) investing activities was $3.8 million, $(23.7) million and $(50.8) million, respectively, and is primarily comprised of capital expenditures, business acquisitions, sales of assets and investments.
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•Capital expenditures for fiscal year 2020 were comprised of $10.6 million for property, plant and equipment primarily related to orchard and real estate development projects. Additionally, in fiscal year 2020, we received proceeds from sale of stock in Calavo of $11.0 million, proceeds from sales of property assets of $6.3 million and contributed $2.8 million to the Joint Venture for the development of our East Area I real estate development project.
•Capital expenditures for fiscal year 2019 were comprised of $14.1 million for property, plant and equipment primarily related to orchard and vineyard development and the purchase of a photovoltaic solar array and $1.8 million for real estate development projects. Additionally, in fiscal year 2019, we purchased an agriculture property for $0.4 million, contributed $4.0 million to the Joint Venture for the development of our East Area I real estate development project and paid $15.0 million for the Trapani Fresh joint venture formation in Argentina. Further, we sold 50,000 shares of stock in Calavo for $4.8 million and sold property assets and a real estate development parcel for $4.0 million and $2.9 million, respectively.
•Capital expenditures for fiscal year 2018 were comprised of $12.2 million for property, plant and equipment primarily related to orchard and vineyard development and $1.7 million for real estate development projects. Additionally, in fiscal year 2018, we purchased San Pablo for $13.1 million, Oxnard Lemon for $25.0 million, a real estate development parcel for $1.4 million and contributed $3.5 million to the Joint Venture for the development of our East Area I real estate development project. Further, we sold 50,000 shares of stock in Calavo for $4.7 million and a real estate development parcel for $1.5 million.
Cash Flows from Financing Activities
For the years ended October 31, 2020, 2019 and 2018 net cash provided by financing activities was $7.4 million, $22.4 million and $32.5 million, respectively.
•The $7.4 million of cash provided by financing activities for fiscal year 2020 is primarily comprised of net borrowings of long-term debt in the amount of $17.0 million. Additionally, we paid common and preferred dividends, in aggregate, of $5.9 million and purchases of shares of our common stock of $3.5 million under our share repurchase program in fiscal year 2020.
•The $22.4 million of cash provided by financing activities for fiscal year 2019 is primarily comprised of net borrowings of long-term debt in the amount of $28.9 million. Additionally, we paid common and preferred dividends, in aggregate, of $5.8 million in fiscal year 2019.
•The $32.5 million of cash provided by financing activities for fiscal year 2018 is primarily comprised of net proceeds from our public offering of common stock of $64.1 million partially offset by net repayments of long-term debt in the amount of $26.4 million. Additionally, we paid common and preferred dividends, in aggregate, of $4.5 million in fiscal year 2018.
Transactions Affecting Liquidity and Capital Resources
Our Company and Farm Credit West, FLCA (“Farm Credit West”) are parties to that certain Master Loan Agreement (the “Loan Agreement”), dated June 20, 2017, which includes a Revolving Credit Supplement and a Non-Revolving Credit Supplement (together, the “Supplements”).
On June 30, 2020, we entered into a Conversion Agreement with Farm Credit West to convert term loans to fixed interest rate loans effective July 1, 2020. No changes were made to the outstanding principal balances on the term loans and no cash repayments of principal we made by us. The rates are subject to a prepayment restriction period for a portion of the fixed rate term that will expire on January 1, 2021, after which we may prepay any amounts without penalty.
In March 2020, we entered into a revolving equity line of credit promissory note and loan agreement with Farm Credit West for a $15.0 million Revolving Equity Line of Credit (the "RELOC") secured by a first lien on the Windfall Investors, LLC property. The RELOC matures in 2043 and features a 3-year draw period followed by 20 years of fully amortized loan payments. The interest rate is variable with monthly interest-only payments during the 3-year draw period and monthly principal and interest payments thereafter.
The Supplements and RELOC provide aggregate borrowing capacity of $130.0 million comprised of $75.0 million under the Revolving Credit Supplement, $40.0 million under the Non-Revolving Credit Supplement and $15.0 million under the RELOC. The borrowing capacity based on collateral value was $130.0 million at October 31, 2020.
The interest rate for any amount outstanding under the Supplements is based on the one-month London Interbank Offered Rate (“LIBOR”) rate plus an applicable margin, which is subject to adjustment on a monthly basis. The applicable margin ranges from
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1.60% to 2.35% depending on the ratio of current assets plus the remaining available commitment divided by current liabilities. On July 1 of each year, we have the option to convert the interest rate in use under each Supplement from the preceding LIBOR-based calculation to a variable interest rate, or the reverse, as applicable. Any amounts outstanding under the Supplements are due and payable in full on July 1, 2022.
All indebtedness under the Loan Agreement and RELOC with Farm Credit West, including any indebtedness under the Supplements, is secured by a first lien on certain of our agricultural properties in Tulare and Ventura counties in California and certain of our building fixtures and improvements and investments in mutual water companies associated with the pledged agricultural properties. The Loan Agreement includes customary default provisions that provide that should an event of default occur, Farm Credit West, at its option, may declare all or any portion of the indebtedness under the Loan Agreement to be immediately due and payable without demand, notice of non-payment, protest or prior recourse to collateral, and terminate or suspend our right to draw or request funds on any loan or line of credit.
The Loan Agreement subjects us to affirmative and restrictive covenants including, among other customary covenants, financial reporting requirements, requirements to maintain and repair any collateral, restrictions on the sale of assets, restrictions on the use of proceeds, prohibitions on the incurrence of additional debt and restrictions on the purchase or sale of major assets of our business.
Under the Loan Agreement, we are required to comply with a minimum debt service coverage ratio (as calculated in accordance with the Loan Agreement) of 1.25:1.0 measured as of October 31 each year. In May 2020, the Loan Agreement was amended to adjust the debt service ratio to 1.00:1.0 for October 31, 2020. In August 2020, Farm Credit West modified the covenant to defer measurement at October 31, 2020 and revert to a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2021. We expect to be in compliance with these covenants in fiscal year 2021. We expect to be in compliance with these covenants in 2021.
In February 2020, we received an annual patronage dividend of $1.0 million from Farm Credit West, of which $0.7 million was recorded as a reduction in interest expense and $0.3 million reduced our real estate development assets. In July 2020, Farm Credit West declared an additional annual cash patronage dividend of $0.6 million received in August 2020, of which we recorded $0.4 million as a reduction in interest expense and $0.2 million reduction in our real estate development assets as of October 31, 2020.
In April 2020, we entered into a Promissory Note with City National Bank for a $3.6 million loan (the “PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The PPP Loan had a two-year term, an interest rate of 1.0% per annum, and was able to be prepaid at any time prior to maturity with no prepayment penalties. In April 2020, we returned the $3.6 million in proceeds from the PPP Loan.
We finance our working capital and other liquidity requirements primarily through cash from operations and our Farm Credit West Credit Facility, which includes the Loan Agreement, Supplements and RELOC. In addition, we have Farm Credit West term loans, the Wells Fargo term loan, the Banco de Chile term loan and a note payable to the sellers of a land parcel. Additional information regarding the Farm Credit West Credit Facility, the Farm Credit West term loans, the Wells Fargo term loan, the Banco de Chile term loan and the note payable can be found in the notes to consolidated financial statements included in this Annual Report.
We believe that the cash flows from operations and available borrowing capacity from our existing credit facilities will be sufficient to satisfy our capital expenditures, debt service, working capital needs and other contractual obligations for fiscal year 2021. In addition, we have the ability to control a portion of our investing cash flows to the extent necessary based on our liquidity demands.
Farm Credit West Credit Facility
As of October 31, 2020, our outstanding borrowings under the Farm Credit West Credit Facility were $102.3 million and we had $27.7 million of availability. The Farm Credit West revolving line of credit balance of $62.3 million currently bears interest at a variable rate equal to the one-month LIBOR plus 1.60%. The interest rate resets on the first of each month and was 1.75% at October 31, 2020. We have the ability to prepay any amounts outstanding under the Farm Credit West revolving line of credit without penalty. We have the option of fixing the interest rate under the Farm Credit West Credit Facility on any portion of outstanding borrowings using interest rate swaps.
Farm Credit West Term Loans
As of October 31, 2020, we had an aggregate of approximately $17.1 million outstanding under Farm Credit West Term Loans, which are further discussed here:
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•Term Loan Maturing November 2022. As of October 31, 2020, we had $1.4 million outstanding under the Farm Credit West Term Loan that matures in November 2022. On July 1, 2020, the term loan was converted to a fixed rate of 2.48% and is payable in quarterly installments through November 2022. This term loan is secured by certain of our agricultural properties.
•Term Loan Maturing October 2035. As of October 31, 2020, Windfall had $1.0 million outstanding under the Farm Credit West Term Loan that matures in October 2035. On July 1, 2020, the term loan was converted to a fixed rate of 3.24% and is payable in monthly installments through October 2035. This term loan is secured by the Windfall Farms property.
•Term Loan Maturing March 2036. As of October 31, 2020, we had $8.4 million outstanding under the Farm Credit West Term Loan that matures in March 2036. On July 1, 2020, the term loan was converted to a fixed rate of 3.24% and is payable in monthly installments through March 2036. This term loan is secured by certain of our agricultural properties.
•Term Loan Maturing March 2036. As of October 31, 2020, we had $6.2 million outstanding under the Farm Credit West Term Loan that matures in March 2036. On July 1, 2020, this loan was converted to a fix rate of 2.77% until July 1, 2025, becoming variable for the remainder of the loan at a variable rate equal to an internally calculated rate based on Farm Credit West’s internal monthly operations and their cost of funds and generally follows the changes in the 90-day treasury rates in increments divisible by 0.25%. This term loan is payable in monthly installments through March 2036 and is secured by certain of our agricultural properties.
The Farm Credit West Term Loans contain various conditions, covenants and requirements with which our Company and Windfall must comply. In addition, our Company and Windfall are subject to limitations on, among other things, selling, abandoning or ceasing business operations; merging or consolidating with a third party; disposing of a substantial portion of assets by sale, transfer, gifts or lease except for inventory sales in the ordinary course of business; obtaining credit or loans from other lenders other than trade credit customary in the business; becoming a guarantor or surety on or otherwise liable for the debts or obligations of a third party; and mortgaging, pledging, leasing for over a year, or otherwise making or allowing the filing of a lien on any collateral.
Wells Fargo Term Loan
As of October 31, 2020, we had $3.5 million outstanding under the Wells Fargo Term Loan. This term loan bears interest at a fixed rate of 3.58% and is payable in monthly installments through January 2023. Certain equipment associated with our new lemon packing facilities secure this loan. The loan contains affirmative and restrictive covenants including, among other customary covenants, financial reporting requirements, requirements to maintain and repair any collateral, restrictions on the sale of assets, restrictions on the use of proceeds, prohibitions on the incurrence of additional debt and restrictions on the purchase or sale of major assets. We are also subject to a covenant that we will maintain a debt service coverage ratio greater than 1.25:1.0 measured annually at October 31, with which we were not in compliance at October 31, 2020. The non-compliance was waived by Wells Fargo. We expect to be in compliance with these covenants in fiscal year 2021.
Banco de Chile Term Loan
Through the acquisition of PDA in February 2017, we assumed a $1.7 million term loan with Banco de Chile that matures in January 2025. This term loan bears interest at a fixed rate of 6.48% and is payable in eight annual installments which began in January 2018. This loan is unsecured and contains certain pre-payment limitations.
Banco de Chile Small Business Guarantee Fund Loans
In July and September 2020, PDA and San Pablo entered into term loan agreements for an aggregate amount of approximately $0.5 million. These small business loans are guaranteed by the Chilean government in response to economic instability caused by the COVID-19 pandemic. The unsecured loans mature in July and September 2024, bear interest at fixed rates of 3.48% and 2.90% and are payable in monthly installments beginning February and April 2021, respectively.
Note Payable
In February 2018, we exercised an option to purchase a 7-acre parcel adjacent to our East Area II real estate development project. In connection with this purchase, we issued a note payable for $1.4 million secured by first deed of trust, payable to the sellers. The note is due in February 2023, with interest-only, monthly payments at interest rates ranging from 5.0% to 7.0% and was 6.0% at October 31, 2020.
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Public Offering of Common Stock
In June 2018, we completed the sale of an aggregate of 3,136,000 shares of our common stock, at a price of $22.00 per share, to a limited number of institutional and other investors in a registered offering under the shelf registration statement. The offering represented 18% of our outstanding common stock on an after-issued basis as of June 25, 2018. Upon completion of the offering and issuance of common stock, we had 17,669,000 shares of common stock outstanding. The net proceeds from the sale of shares, after deducting underwriting discounts and our expenses related to the offering, were approximately $64.1 million. In June and July 2018, we used the offering proceeds to pay down debt, purchase San Pablo ranch and purchase Oxnard Lemon's packinghouse, related land and certain other assets.
Interest Rate Swaps
From time to time, we enter into interest rate swap agreements to manage the risks and costs associated with our financing activities.
Our debt bears interest at fixed and variable rates, ranging from 1.75% to 6.48% at October 31, 2020. As of October 31, 2020 and 2019, we had no outstanding interest rate swap agreements.
Treasury Stock
On March 12, 2020, the Board of Directors of our Company approved a share repurchase program authorizing us to repurchase up to $10.0 million of our outstanding shares of common stock through March 2021. Under the share repurchase program, purchases of shares of common stock may be made from time to time in the open market or in privately negotiated transactions. The share repurchase program may be modified, suspended or discontinued at any time and does not commit us to repurchase shares of our common stock. During fiscal year 2020, we repurchased 250,977 shares under the share repurchase program for approximately $3.5 million.
Real Estate Development Activities and Related Capital Resources
As noted under “Transactions Affecting Liquidity and Capital Resources,” we have the ability to control a portion of our investing cash flows to the extent necessary based upon our liquidity demands. In order for our real estate development operations to reach their maximum potential benefit to us, however, we will need to be successful over time in identifying other third party sources of capital to partner with us to move those development projects forward. While we are frequently in discussions with potential external sources of capital in respect to all of our development projects, current market conditions for California real estate projects, while improving, continue to be challenging and make it difficult to predict the timing and amounts of future capital that will be required to complete the development of our projects.
In November 2015, we entered into the Joint Venture with Lewis for the residential development of our East Area I real estate development project. To consummate the transaction, we formed LLCB as the development entity, contributed our East Area I property to the Joint Venture and sold a 50% interest in the Joint Venture to Lewis for $20.0 million. We expect to receive approximately $100.0 million from the Joint Venture over the estimated 10 to 12-year life of the project including $20.0 million received on the consummation of the Joint Venture. The Joint Venture partners will share in capital contributions to fund project costs until loan proceeds and/or revenues are sufficient to fund the project. Since inception each Joint Venture partner has made funding contributions of $21.4 million, including $2.8 million, $4.0 million and $3.5 million in fiscal years 2020, 2019 and 2018, respectively. The first phase of the project broke ground to commence mass grading in November 2017. Project plans include approximately 1,500 residential units with 632 residential units in Phase 1 and site improvements substantially completed. Lot sales representing a total of 144 and 210 residential units closed in fiscal years 2020 and 2019, respectively. The Joint Venture closed on an additional 44 units in the first quarter of fiscal year 2021 and 354 residential units have closed from the projects inception to October 31, 2020.
Trend Information
Agribusiness Division
The worldwide fresh produce industry has historically enjoyed consistent underlying demand and favorable growth dynamics. In recent years, the market for fresh produce has increased faster than the rate of population growth, supported by ongoing trends including greater consumer demand for healthy, fresh and convenient foods, increased retailer square footage devoted to fresh produce, and greater emphasis on fresh produce as a differentiating factor in attracting customers. Health-conscious consumers are driving much of the growth in demand for fresh produce. Over the past several decades, the benefits of natural, preservative-free and
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organic foods have become an increasingly significant element of the public dialogue on health and nutrition. As a result, consumption of fresh fruit and vegetables has markedly increased.
According to the USDA, U.S. per capita consumption of fresh lemons was 4.9 pounds in 2019, and since 2000, has averaged 3.4 pounds per capita versus 2.7 pounds per capita in the 1990s. Approximately 73% of the California crop has gone into the fresh market in the past decade. The fresh market is significantly more profitable than the processed market and the amount of production sold in the fresh market is referred to as fresh utilization. Our fresh utilization has historically been comparable to the California industry average and we expect that our fresh utilization will increase due to increased flexibility to sell lemons directly to food service wholesale and retail customers and increased customer interaction resulting from our direct lemon sales strategy.
According to the USDA, U.S. per capita consumption of avocados was 7.9 pounds in 2019, and since 2000, has averaged 4.9 pounds per capita versus 1.6 pounds per capita in the 1990's. A growing Hispanic population, an increasing awareness of healthier foods and the acceptance of mono-unsaturated fats has helped to spur demand for avocados. California is the largest U.S. producer of avocados producing approximately 87% of the nation's avocados. According to the California Avocado Commission, the 2020 crop produced approximately 376 million pounds compared to 217 million pounds in 2019, 338 million pounds in 2018 and the ten year average of 339 million pounds.
Navel oranges comprise most of California’s orange crop, accounting for approximately 82% over the past three growing seasons. Valencia oranges account for a vast majority of the remainder of California’s orange crop. While California produces approximately 44% of the nation’s oranges, its crop accounts for approximately 91% of those going to the fresh market. The share of California’s crop going to fresh market, as opposed to the processed market (i.e., juices, oils and essences) varies by season, depending on the quality of the crop.
Real Estate Development Division
We incurred impairment charges on one of our real estate development projects in fiscal years 2018 and future impairment is possible. No impairment charges were recorded in fiscal year 2020 or 2019. Due to these factors, we anticipate maintaining a cautious and patient perspective with respect to our real estate development activities. However, interest rates are also at historically low levels, which provide a favorable buying opportunity for potential home buyers. Additionally, we believe that our real estate development properties have certain unique characteristics and are located in desirable locations, particularly East Area I, and as economic or real estate market conditions improve or other factors arise, we will take advantage of such opportunities to develop our properties.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table presents our contractual obligations at October 31, 2020, for which cash flows are fixed and determinable (in thousands):
Payments due by Period
Total < 1 year 1-3 years 3-5 years 5+ years
We believe that the cash flows from operations and borrowing capacity from existing and available credit facilities will be sufficient to satisfy our future capital expenditure, debt service, working capital and other contractual obligations for fiscal year 2021. In addition, we have the ability to control a portion of our investing cash flows to the extent necessary based on our liquidity demands.
Fixed Rate and Variable Rate Debt
Details of amounts included in long-term debt can be found above and in the accompanying notes to consolidated financial statements included in this Annual Report. The table above assumes that long-term debt is held to maturity.
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Interest Payments on Fixed and Variable Debt
The above table assumes that our fixed rate and long-term debt is held to maturity.
Preferred Stock Dividends
In 1997, in connection with the acquisition of Ronald Michaelis Ranches, Inc., we issued 30,000 shares of Series B Convertible Preferred Stock at $100 par value (the “Series B Stock”), of which 14,790 shares are currently outstanding. The holders of the Series B Stock are entitled to receive cumulative cash dividends at an annual rate of 8.75% of par value. Such dividends are payable quarterly on the first day of January, April, July and October in each year and totaled $0.1 million in each of the fiscal years 2020, 2019 and 2018, respectively.
In 2014, we issued, in aggregate, 9,300 shares of Series B-2 Preferred Stock at $100 par value (the “Series B-2 Preferred Stock”). The holders of the Series B-2 Preferred Stock are entitled to receive cumulative cash dividends at an annual rate of 4% of the liquidation value of $1,000 per share. Such dividends are payable quarterly on the first day of January, April, July and October in each year and totaled $0.4 million in each of the fiscal years 2020, 2019 and 2018, respectively.
Defined Benefit Pension Plan
We have a noncontributory, defined benefit, single employer pension plan (the “Plan”), which provides retirement benefits for all eligible employees of our Company. Effective June 2004, we froze the Plan and no additional benefits accrued to participants subsequent to that date. We may make discretionary contributions to the Plan and we may be required to make contributions to adhere to applicable regulatory funding provisions, based in part on the Plan’s asset valuations and underlying actuarial assumptions. We made funding contributions of zero, $0.6 million and $0.6 million in fiscal years 2020, 2019 and 2018, respectively and we do not plan to contribute to the Plan in fiscal year 2021.
Operating Lease Obligations
We have numerous operating lease commitments with remaining terms ranging from less than one year to 17 years. We lease machinery and equipment for our packing operations and other land for our agricultural operations. Further information regarding our Company leases can be found in Note 13, "Leases" of the notes to consolidated financial statements included in this Annual Report.
Real Estate Development Activities, Capital Expenditures and Related Capital Resources
On November 10, 2015 (the “Transaction Date”), we entered into the Joint Venture with Lewis for the residential development of our East Area I real estate development project. To consummate the transaction, we formed LLCB as the development entity, contributed our East Area I property to the Joint Venture and sold a 50% interest in the Joint Venture to Lewis for $20.0 million.
The Joint Venture agreement provides that Lewis will serve as the manager of the Joint Venture with the right to manage, control and conduct its day-to-day business and development activities. Certain major decisions, which are enumerated in the Joint Venture agreement, require approval by an executive committee comprised of two representatives appointed by Lewis and two representatives appointed by Limoneira.
Pursuant to the Joint Venture agreement, the Joint Venture will own, develop, subdivide, entitle, maintain, improve, hold for investment, market and dispose of the Joint Venture’s property in accordance with the business plan and budget approved by the executive committee.
Further, on the Transaction Date, the Joint Venture and Limoneira entered into a lease agreement (the "Lease Agreement"), pursuant to which the Joint Venture leased certain of the contributed East Area I property back to Limoneira for continuation of agricultural operations, and certain other permitted uses, on the property until the Joint Venture required the property for development. Limoneira terminated this Lease Agreement per the agreement in fiscal year 2019.
Limoneira and the Joint Venture entity also entered into a Retained Property Development Agreement on the Transaction Date (the "Retained Property Agreement"). Under the terms of the Retained Property Agreement, the Joint Venture will transfer certain contributed East Area I property, which is entitled for commercial development, back to Limoneira (the "Retained Property") and arrange for the design and construction of certain improvements to the Retained Property, subject to certain reimbursements by Limoneira. In August 2018, the Retained Property was transferred back to Limoneira.
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We expect to receive approximately $100.0 million from the Joint Venture over the estimated 10 to 12-year life of the project including $20.0 million received on the consummation of the Joint Venture. The Joint Venture partners will share in capital contributions to fund project costs until project loan proceeds and or revenues are sufficient to fund the project. Since inception, each Joint Venture partner has made funding contributions of $21.4 million, including $2.8 million, $4.0 million and $3.5 million in fiscal years 2020, 2019 and 2018, respectively.
In January 2018, the Joint Venture entered into a $45.0 million unsecured Line of Credit Loan Agreement and Promissory Note (the “Loan”) with Bank of America, N.A. to fund early development activities. The Loan matures in January 2020, with an option to extend the maturity date until 2021, subject to certain conditions. The interest rate on the Loan is LIBOR plus 2.85%, payable monthly. The Loan contains certain customary default provisions and the Joint Venture may prepay any amounts outstanding under the Loan without penalty. In February 2018, the obligations under the Loan were guaranteed by certain principals from Lewis and by us. The Joint Venture recorded a $30.4 million outstanding loan balance at October 31, 2020 related to this Loan.
As noted above under “Transactions Affecting Liquidity and Capital Resources,” we have the ability to control the timing of a portion of our investing cash flows to the extent necessary based upon our liquidity demands. In order for our real estate development operations to reach their maximum potential benefit to our Company, however, we will need to be successful over time in identifying other third-party sources of capital to partner with us to move those development projects forward. While we are frequently engaged in discussions with several external sources of capital in respect of all of our development projects, current market conditions for California real estate projects, while improving, continue to be challenging and make it difficult to predict the timing and amounts of future capital that will be required to complete the development of our projects.
Off-Balance Sheet Arrangements
As discussed in Note 7 – Real Estate Development and Note 8 – Equity in Investments of the notes to consolidated financial statements included in this Annual Report, we have investments in joint ventures and partnerships that are accounted for using the equity method of accounting.
Inflation
Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, including in Argentina, could have an adverse impact on our business, financial condition and results of operations.
Critical Accounting Policies