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.
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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 California, Florida, Louisiana, Georgia, South Carolina and Texas and internationally in countries such as Mexico. Due to the discovery of ACP in our orchards, we have experienced costs related to the quarantine and treatment of ACP and incurred approximately $0.5 million of costs in fiscal year 2021 related to pest control efforts targeted against ACP. To date, HLB has been detected in Los Angeles, Orange, Riverside, San Bernardino and San Diego Counties in California, however there has been no HLB detected in our orchards. There can be no assurance that HLB will not be further detected in the future.
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
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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.
Our lemons are generally grown and marketed throughout the year. Our Navel oranges are primarily sold from January through April and our Valencia oranges are primarily sold from June through September. Our avocados are primarily sold from January through August. Our specialty citrus is primarily sold from November through June and our pistachios and wine grapes are primarily sold 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 wage rates rise each year based on the annual cost of living and increased from $12.00 per hour to $12.15 per hour, effective January 1, 2021, and will increase to $12.80 per hour in 2022. 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.
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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.
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 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 experienced below average precipitation in the 2019 - 2020 and 2020 - 2021 rainfall season and above average precipitation in the first three months of the current rainfall season as of December 31, 2021. According to the U.S. Drought Monitor, California is experiencing severe drought conditions as of December 31, 2021. In October 2021, the California Governor declared a drought state of emergency statewide. Federal officials who oversee the Central Valley Project, California’s largest water delivery system, allocated 5% of the contracted amount of water to San Joaquin Valley farmers in 2021 compared to 100% in 2017 through 2020. We are assessing the impact these reductions may have on our California orchards.
In August 2021, the U.S. Bureau of Reclamation declared a Level 1 Shortage Condition at Lake Mead in the Lower Colorado River Basin for the first time ever, requiring shortage reductions and water savings contributions for states in the southwest. Beginning January 1, 2022, Arizona will see water releases from Lake Mead reduced by approximately 18% of the state’s annual apportionment. We are assessing the impact these reductions may have on our Arizona orchards.
For fiscal year 2021, irrigation costs for our agricultural operations were $0.7 million higher than fiscal year 2020. 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 continuing in fiscal year 2022 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.
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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 that 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 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 or supply chain issues 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, One World of Citrus®, 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.
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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.
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;
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•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 contain a financial covenant that requires us to maintain compliance with a specified debt service coverage ratio on an annual basis. In December 2021, the Lender modified the covenant to defer measurement at October 31, 2021 and revert to a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2022. 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.
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 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, LLCB 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, as modified and extended, matures February 22, 2023 and has a one-year extension option through February 22, 2024 subject to terms and conditions as defined in the agreement, with the maximum borrowing amount reduced to $35.0 million during the extension period. The Loan contains certain customary default provisions and LLCB may prepay any amounts outstanding under the Loan without penalty. The obligations under the Loan are guaranteed by certain principals from Lewis and us. Defaults by LLCB 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 our Company’s debt agreements use LIBOR as a reference rate. The expected discontinuation of LIBOR after 2021 could have a significant impact on us 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.
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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.
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 Board of Governors of the Federal Reserve System 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 $83.0 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
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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.
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;
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•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.
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
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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.
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,
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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 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, 2021, directors and members of our executive management team beneficially owned or controlled approximately 6.6% 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
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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.
In our Annual Report for fiscal year ended October 31, 2020 we identified a material weakness in our internal control over financial reporting. If we fail to properly remediate any 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 previously disclosed in our Annual Report for fiscal year ended October 31, 2020, we identified a material weakness in our internal control over financial reporting related to an acquired foreign subsidiary in the first year the subsidiary was included in management’s evaluation of the effectiveness of our internal control over financial reporting. In fiscal year 2021, we remediated the material weakness and the remediation measures have strengthened the design and operating effectiveness of our internal control over financial reporting.
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
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 1,200 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 6,100 acres of lemons, approximately 800 acres of avocados, approximately 1,000 acres of oranges and approximately 900 acres of specialty citrus and other crops. Our agribusiness land holdings are summarized below as of October 31, 2021 (in thousands, except per acre amounts):
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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 $95.9 million included in property, plant and equipment in the notes to the consolidated financial statements in Item 8 of this Annual Report. 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 900 residential units and approximately 811,000 square feet of commercial space.
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 use ground water provided by wells and surface water for our PDA and San Pablo farming operations in La Serena, Chile and our Trapani Fresh farming operations in Argentina.
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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, 2021, there were approximately 228 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 2021, we declared our quarterly dividend of $0.075 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
None.
Item 6. Reserved
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10-K). 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 on Form 10-K. This section generally discusses the results of operations for fiscal year 2021 compared to fiscal year 2020. For discussion related to the results of operations and changes in financial condition for fiscal year 2020 compared to fiscal year 2019 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on January 14, 2021.
Overview
Limoneira Company, a Delaware corporation, is 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 have three business divisions: agribusiness, rental operations and real estate development. The agribusiness division is comprised of four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness, which includes oranges, specialty citrus and other crops. The agribusiness division includes our core operations of farming, harvesting, lemon packing and lemon sales operations. The rental operations division includes our residential and commercial rentals comprised of 256 completed rental units, 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 2021 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:
Loss (gain) on disposal of assets 109 — 502 — (1,069) (1)%
Operating loss:
Loss (gain) on disposal of assets (109) (502) 1,069
Other income (expense):
Interest expense, net of patronage dividends (1,501) (2,048) (2,341)
Loss on stock in Calavo Growers, Inc. — (6,299) (2,117)
Loss (income) attributable to noncontrolling interest 456 1,506 (477)
Net loss attributable to Limoneira Company $ (3,441) $ (16,435) $ (5,943)
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 Growers, Inc. ("Calavo") and loss (gain) on disposal of assets, is an important measure to evaluate our results of operations between periods on a more comparable basis. Adjusted EBITDA in previous periods also excluded LLCB earnings in equity investment which is no longer excluded due to management’s anticipation of future cash distributions related to the investment in LLCB. Adjusted EBITDA for prior periods has been restated to conform to the current presentation. 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.
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EBITDA and adjusted EBITDA are summarized and reconciled to net loss 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):
Years Ended October 31,
Net loss attributable to Limoneira Company $ (3,441) $ (16,435) $ (5,943)
Interest expense, net of patronage dividends 1,501 2,048 2,341
Loss on stock in Calavo Growers, Inc. — 6,299 2,054
Loss (gain) on disposal of assets 109 502 (991)
Fiscal Year 2021 Compared to Fiscal Year 2020
Revenues
Total revenues for fiscal year 2021 were $166.0 million compared to $164.6 million for fiscal year 2020. The 1% increase of $1.5 million was primarily the result of increased lemons and specialty citrus and other crops agribusiness revenues, partially offset by decreased avocados and oranges agribusiness revenues, as detailed below ($ in thousands):
Agribusiness Revenues for the Years Ended October 31,
•Lemons: The increase in fiscal year 2021 was primarily the result of increased brokered fruit and other lemon sales, partially offset by decreased fresh lemon sales, compared to fiscal year 2020. Brokered fruit and other lemon sales for fiscal years 2021 and 2020 were $36.0 million and $18.9 million, respectively. The increase in brokered fruit in fiscal year 2021 was primarily the result of higher volume and higher prices of brokered fruit sales, compared to fiscal year 2020. During fiscal years 2021 and 2020, brokered fruit sales were $29.3 million and $12.2 million on 1.4 million and 0.6 million cartons of brokered fruit sold at average per carton prices of $21.63 and $19.82, respectively. The decrease in fresh lemon sales in fiscal year 2021 was primarily the result of lower volume, partially offset by higher prices of fresh lemons sold, compared to fiscal year 2020. During fiscal years 2021 and 2020, fresh lemon sales were $85.9 million and $101.1 million on 4.4 million and 5.5 million cartons of fresh lemons packed and sold at average per carton prices of $19.60 and $18.32, respectively. Lemon revenues in fiscal years 2021 and 2020 included shipping and handling of $17.5 million and $13.4 million and lemon by-products of $3.5 million and $4.1 million, respectively.
•Avocados: The decrease in fiscal year 2021 was primarily the result of lower volume, partially offset by higher prices of avocados sold, compared to fiscal year 2020. The California avocado crop typically experiences alternating years of high and low production due to plant physiology. During fiscal years 2021 and 2020, 5.7 million and 8.0 million pounds of avocados were sold at average per pound prices of $1.20 and $1.10, respectively. Higher prices in fiscal year 2021 were primarily related to lower supply of fruit in the marketplace.
•Oranges: The decrease in fiscal year 2021 was primarily due to lower prices and volume of oranges sold, compared to fiscal year 2020. During fiscal years 2021 and 2020, sales consisted of 545,000 and 743,000 40-pound carton equivalents of oranges sold at average per carton prices of $8.04 and $10.39, respectively.
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•Specialty citrus and other crops: The increase in fiscal year 2021 was primarily the result of higher volume of wine grapes sold, compared to fiscal year 2020. In fiscal year 2021, we sold approximately 2,164 tons of wine grapes for $3.0 million compared to approximately 1,610 tons of wine grapes for $1.5 million in fiscal year 2020.
Other operations revenue in fiscal year 2021 was similar to fiscal year 2020.
Costs and Expenses
Total costs and expenses for fiscal year 2021 were $172.4 million compared to $183.6 million for fiscal year 2020. This 6% decrease of $11.2 million was primarily attributable to decreases in our agribusiness costs and selling, general and administrative expenses. Costs associated with our agribusiness division include packing costs, harvest costs, growing costs, costs related to the lemons we procure from third-party growers and suppliers and depreciation and amortization expense. These costs are discussed further below ($ 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 $36.0 million and $42.6 million in fiscal years 2021 and 2020, respectively. The decrease in fiscal year 2021 was primarily attributable to lower volume of fresh lemons packed and sold, partially offset by higher average per carton costs, compared to fiscal year 2020. In fiscal years 2021 and 2020, we packed and sold 4.4 million and 5.5 million cartons of lemons at average per carton costs of $8.22 and $7.71, respectively. The increase in average per carton costs in fiscal year 2021, compared to fiscal year 2020, was primarily due to decreased volume of lemons packed and sold. Additionally, in fiscal years 2021 and 2020, packing costs included $2.7 million and $3.0 million of shipping costs, respectively.
•Harvest costs: The decrease in fiscal year 2021 was primarily attributable to decreased volume of lemons, avocados and oranges harvested compared to fiscal year 2020.
•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 decrease in fiscal year 2021 compared to fiscal year 2020 reflects farm management decisions based on weather, harvest timing and crop conditions.
•Third-party grower and supplier costs: We sell fruit that we grow and fruit that we procure from other growers and suppliers. The cost of procuring fruit from others is referred to as third-party grower and supplier costs. The increase in fiscal year 2021 was primarily due to increased volume of fruit procured from suppliers, partially offset by decreased volume of fruit procured from third party growers, compared to fiscal year 2020. In fiscal years 2021 and 2020, costs for purchased, packed fruit for resale increased by $9.8 million; we incurred costs of $25.2 million and $15.5 million, respectively. During fiscal years 2021 and 2020, of the 4.4 million and 5.5 million lemon cartons sold, 2.3 million (52%) and 3.3 million (60%) were procured from third-party growers at average per carton prices of $13.83 and $11.71, respectively: a decrease of $7.3 million.
•Depreciation and amortization: Depreciation and amortization expense in fiscal year 2021 was $0.3 million lower than fiscal year 2020.
Other operations expenses for fiscal years 2021 and 2020 were $4.3 million and $4.5 million, respectively.
Loss on disposal of assets for fiscal years 2021 and 2020 were $0.1 million and $0.5 million, respectively.
Selling, general and administrative expenses for fiscal year 2021 were $19.4 million compared to $21.3 million for fiscal year 2020. The $1.9 million decrease was primarily the result of:
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•$0.7 million decrease in hardware, software and training costs associated with an ERP implementation
•$0.6 million decrease in selling expenses; and
•$0.5 million decrease in other selling, general and administrative expenses, including certain corporate overhead expenses.
Other Income (Expense)
Other income (expense), for fiscal year 2021 was $2.2 million compared to $(7.4) million for fiscal year 2020. The $9.6 million increase in other income (expense) was primarily the result of:
•$0.5 million decrease in interest expense as a result of increased amounts capitalized;
•$2.9 million increase in equity in earnings of investments primarily from LLCB; and
•$6.3 million decrease in the loss on stock in Calavo.
Income Taxes
We recorded for fiscal years 2021 and 2020 income tax benefit of $0.3 million and $8.5 million on pre-tax loss of $4.2 million and $26.4 million, respectively. The tax provision recorded for fiscal year 2021 differs from the U.S. federal statutory tax rate of 21% due primarily to foreign jurisdictions which are taxed at different rates, state taxes, nondeductible tax items and valuation allowances on certain deferred tax assets of foreign subsidiaries. Our effective tax rate for fiscal years 2021 and 2020 was 6.4% and 32.2%, respectively.
Loss (Income) Attributable to Noncontrolling Interest
Loss (income) attributable to noncontrolling interest primarily represents 10% and 49% of the net losses of PDA and Trapani Fresh, respectively.
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.
Segment information for fiscal year 2021 (in thousands):
Segment information for fiscal year 2020 (in thousands):
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Fiscal Year 2021 Compared to Fiscal Year 2020
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 brokered fruit other lemon revenue. For fiscal year 2021, our fresh lemons segment revenue was $125.4 million compared to $124.2 million for fiscal year 2020. The 1% increase of $1.3 million was primarily the result of higher prices partially offset by lower 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 and suppliers, transportation costs and packing service charges incurred from the lemon packing segment to pack lemons for sale. For fiscal year 2021, our fresh lemon costs and expenses were $116.1 million compared to $125.3 million for fiscal year 2020. The 7% decrease of $9.2 million primarily consisted of the following:
•Harvest costs for fiscal year 2021 were $2.8 million lower than fiscal year 2020.
•Growing costs for fiscal year 2021 were $0.7 million higher than fiscal year 2020.
•Third-party grower and supplier costs for fiscal year 2021 were $4.4 million higher than fiscal year 2020.
•Transportation costs for fiscal year 2021 were $0.2 million lower than fiscal year 2020.
•Intersegment costs and expenses for fiscal year 2021 were $11.2 million lower than fiscal year 2020.
Lemon Packing
Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For fiscal year 2021, our lemon packing segment revenue was $43.2 million compared to $50.2 million for fiscal year 2020. The 14% decrease of $7.1 million was primarily due to decreased volume of lemons packed.
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 2021, our lemon packing costs and expenses were $36.0 million compared to $42.6 million for fiscal year 2020. The 15% decrease of $6.5 million was primarily due to decreased volume of lemons packed.
Lemon packing segment operating income per carton sold was $1.63 and $1.39 for fiscal years 2021 and 2020, respectively.
The lemon packing segment included $25.6 million and $36.8 million of intersegment revenues for fiscal years 2021 and 2020, respectively, which were 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 2021, our avocados segment revenue was $6.8 million compared to $8.8 million for fiscal year 2020, a 23% decrease of $2.0 million.
Cost and expenses associated with our avocados segment include harvest costs and growing costs. For fiscal year 2021, our avocado costs and expenses were $4.2 million compared to $5.2 million for fiscal year 2020. The 19% decrease of $1.0 million primarily consisted of the following:
•Harvest costs for fiscal year 2021 were $0.4 million lower than fiscal year 2020.
•Growing costs for fiscal year 2021 were $0.5 million lower than fiscal year 2020.
Other Agribusiness
For fiscal year 2021, our other agribusiness segment revenue was $11.6 million compared to $13.6 million for fiscal year 2020. The 14% decrease of $1.9 million primarily consisted of the following:
•Orange revenue for fiscal year 2021 was $3.3 million lower than fiscal year 2020.
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•Specialty citrus and other crop revenue for fiscal year 2021 was $1.4 million higher than fiscal year 2020.
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 2021 were $9.2 million compared to $12.1 million for fiscal year 2020. The 24% decrease of $3.0 million primarily consisted of the following:
•Harvest costs for fiscal year 2021 were $0.3 million lower than fiscal year 2020.
•Growing costs for fiscal year 2021 were $0.8 million lower than fiscal year 2020.
•Purchased fruit costs for fiscal year 2021 were $1.9 million lower than fiscal year 2020.
Total agribusiness depreciation and amortization for fiscal year 2021 was $8.6 million compared to $8.9 million in fiscal year 2020. The 4% decrease of $0.3 million was primarily due to reduced amortization as a result of selling and licensing certain intangible assets of Trapani Fresh to FGF in March 2021.
Corporate and Other
Our corporate and other operations had rental revenues of approximately $4.6 million in fiscal years 2021 and 2020.
Costs and expenses in our corporate and other operations were approximately $22.7 million and $25.1 million in fiscal years 2021 and 2020, respectively, and include rental operations costs and selling, general and administrative expenses not allocated to the operating segments. Depreciation and amortization expenses were approximately $1.2 million in fiscal years 2021 and 2020. Additionally, loss on disposal of assets for fiscal years 2021 and 2020 was $0.1 million and $0.5 million, respectively.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash and cash flows generated from our operations and use of our revolving credit facility. 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 projects 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.
Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term fixed rate and variable rate debt and related interest payments, operating and finance leases and our noncontributory, defined benefit pension plan (“the Plan”). In fiscal year 2021, we decided to terminate the Plan effective December 31, 2021. The liabilities disclosed as of October 31, 2021, reflect an estimate of the additional cost to pay lump sums to a portion of the active and vested terminated participants and purchase annuities for all remaining participants from an insurance company. See Notes 12, 13 and 17 to the consolidated financial statements included in this Annual Report for amounts outstanding on October 31, 2021, related to debt, leases and the Plan. Purchase obligations consist of contracts primarily related to packing supplies and pollination services, the majority of which are due in the next three years.
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 the next twelve months. In addition, we have the ability to control a portion of our investing cash flows to the extent necessary based on our liquidity demands.
Cash Flows from Operating Activities
For the fiscal years ended October 31, 2021, 2020 and 2019, net cash provided by (used in) operating activities was $9.6 million, $(11.3) million and $1.4 million, respectively. Our cash flow provided by operating activities is primarily from agricultural sales and rental operations. Cash flow used in operations generally consists of agribusiness costs, rental operation costs, selling, general and administrative expenses. The significant components of our cash flows provided by operating activities are as follows:
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•Net loss was $(3.9) million and $(17.9) million for fiscal years 2021 and 2020, respectively. The components of net loss in fiscal year 2021 compared to fiscal year 2020 consist of an decrease in operating loss of $12.7 million, an increase in total other income (expense) of $9.6 million and a decrease in income tax benefit of $8.2 million.
•The adjustments to reconcile net loss to net cash provided by (used in) operating activities provided $10.2 million of cash in fiscal year 2021 compared to providing $17.6 million of cash in fiscal year 2020, primarily due to significant changes in loss on stock in Calavo, equity in earnings of investments, net and deferred income taxes.
•The changes in operating assets and liabilities, net of business combinations provided $3.3 million of operating cash in fiscal year 2021 compared to using $11.0 million of operating cash in fiscal year 2020, primarily due to significant changes in accounts receivable and receivables/other from related parties, cultural costs, income tax receivable, and accounts payable and growers and suppliers payable.
Cash Flows from Investing Activities
For the years ended October 31, 2021, 2020 and 2019, net cash (used in) provided by investing activities was $(10.2) million, $3.8 million and $(23.7) million, respectively, and is primarily comprised of capital expenditures, business acquisitions, sales of assets and investments.
•Capital expenditures for fiscal year 2021 were comprised of $9.8 million for property, plant and equipment primarily related to orchard and real estate development projects. Additionally, in fiscal year 2021 we invested $0.7 million in mutual water companies and water rights.
•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 LLCB for the development of our East Area I real estate development project.
Cash Flows from Financing Activities
For the years ended October 31, 2021, 2020 and 2019 net cash provided by financing activities was $0.5 million, $7.4 million and $22.4 million, respectively.
•The $0.5 million of cash provided by financing activities for fiscal year 2021 is primarily comprised of net borrowings of long-term debt in the amount of $7.1 million. Additionally, we paid common and preferred dividends, in aggregate, of $5.8 million and paid $0.7 million for the exchange of common stock related to our employees restricted stock awards.
•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.
Transactions Affecting Liquidity and Capital Resources
Credit Facilities and Long-Term Debt
We finance our working capital and other liquidity requirements primarily through cash from operations and our Farm Credit West Credit Facility, which includes the MLA, Supplements and Revolving Equity Line of Credit (the "RELOC"). In addition, we have the Farm Credit West term loans, Banco de Chile term loans and COVID-19 loans, and a note payable to the sellers of a land parcel. Additional information regarding these loans and the note payable can be found in Note 12 to the consolidated financial statements included in this Annual Report.
In June 2021, we entered into the MLA with Lender dated June 1, 2021, together with the Supplements and a Fixed Interest Rate Agreement. The MLA governs the terms of the Supplements. The MLA amends and restates the previous Master Loan Agreement between our Company and the Lender, dated June 19, 2017, and extends the principal repayment to July 1, 2026.
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. As of October 31, 2021, our outstanding borrowings under the Farm Credit West Credit Facility were $111.3 million and we had $18.7 million of availability.
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The MLA 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. We are also subject to a financial covenant that requires us to maintain compliance with a specified debt service coverage ratio on an annual basis. In December 2021, the Lender modified the covenant to defer measurement at October 31, 2021 and revert to a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2022.
In August 2021, we entered into the FCW term loan with the Lender and used the proceeds to pay off the Wells Fargo term loan. The FCW term loan has a fixed interest rate of 3.19% and is payable in monthly installments through September 2026.
In fiscal years 2021 and 2020 we received annual patronage dividends of $1.2 million and $1.6 million, respectively, from Farm Credit West.
Treasury Stock
In fiscal year 2021, our Company's Board of Directors approved a share repurchase program authorizing us to repurchase up to $10.0 million of our outstanding shares of common stock through September 2022; no shares have been repurchased under this program. In fiscal year 2020, we repurchased 250,977 shares for $3.5 million under a program which expired in March 2021.
Dividends
The holders of the Series B Convertible Preferred Stock (the “Series B Stock”) and the Series B-2 Preferred Stock (the “Series B-2 Preferred Stock”) are entitled to receive cumulative cash dividends. Such preferred dividends paid totaled $0.5 million in each of the fiscal years 2021 and 2020.
Cash dividends declared in each of the fiscal years 2021 and 2020 totaled $0.30 per common share and such dividends paid totaled $5.3 million and $5.4 million for fiscal years 2021 and 2020, respectively.
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 collaborate 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 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 a 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 LLCB over the estimated 10 to 12-year life of the project including $20.0 million received on the consummation of LLCB. LLCB's 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 partner has made funding contributions of $21.4 million, including $2.8 million in fiscal year 2020. The first phase of the project broke ground to commence mass grading in November 2017. Project plans currently include approximately 1,500 residential units and site improvements to be completed. Lot sales representing 232 and 144 residential units closed in fiscal years 2021 and 2020, respectively, and 586 residential units have closed from the project's inception to October 31, 2021.
Trend Information
The commodity pricing for our fresh produce, and therefore our revenues and margins, is significantly impacted by consumer demand. 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,
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preservative-free and 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. Conversely, a decrease in demand, as was seen during the COVID-19 pandemic as a result of restaurant closures, has the impact of reducing our pricing and therefore our revenues and margins.
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.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to develop critical accounting policies and make certain estimates, assumptions and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates and judgments on historical experience, available relevant data and other information that we believe to be reasonable under the circumstances, and we continue to review and evaluate these estimates. Actual results may materially differ from these estimates under different assumptions or conditions as new or additional information become available in future periods. For further information on significant accounting policies, see discussion in Note 2 to the consolidated financial statements included in this Annual Report.
Impairment of Real Estate Development Projects – We evaluate our real estate development projects, held either by us or as included specifically within our investment in LLCB, for impairment on an ongoing basis. Our evaluation for impairment involves an initial assessment of each real estate development project to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of, or investment in, real estate development are no longer recoverable. Possible indications of impairment may include events or changes in circumstances affecting the entitlement process, zoning, government regulation, geographical demand for new housing or commercial property, and market conditions related to residential or commercial land lots. When events or changes in circumstances exist, we further evaluate the real estate development for impairment by a) comparing undiscounted future cash flows expected to be generated over the life of the real estate development to the respective carrying amount for its own real estate development or b) determining if its equity in investment has incurred an other-than-temporary decline.
We make significant judgments in evaluating each real estate development project, as held by us or within our investment in LLCB, for possible indications of impairment. These judgments may relate to the identification of appropriate and comparable market prices, the consideration of changes to legal factors or the business climate, the likelihood of successfully completing the entitlement process, changes in zoning or government regulation, and demand for new housing. Changes in these judgments could have a significant impact on real estate development or equity in investments. For fiscal years 2021, 2020 and 2019, no impairment loss has been recognized on any real estate development and no other-than-temporary-impairment has been recognized on our equity in LLCB.
The impairment calculation for real estate developments held by us compares the carrying value of the asset to the asset’s estimated future cash flows (undiscounted). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted). We recognize an impairment loss equal to the amount by which the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset will be its new cost basis. Restoration of a previously recognized impairment loss is prohibited. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to impairment losses that could be material to our results of operations.
Whenever events or changes in circumstances indicate that the carrying amount of our equity investment in LLCB might not be recoverable, then we determine whether an impairment is other-than-temporary. If we conclude the impairment is other-than-temporary, we determine the estimated fair value of the investment by performing a discounted cash flow or market approach analysis and recognize an other-than-temporary impairment to reduce the investment to its estimated fair value.
We believe that the accounting estimate related to impairment of real estate development projects held by us, or other-than-temporary impairment of our equity investment in LLCB, is a critical accounting estimate because it is very susceptible to change from period to period; it requires management to make assumptions about future prices, production, and costs, and the potential impact of a loss from impairment could be material to our earnings. Management’s assumptions regarding future cash flows from
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real estate development projects or return on equity of our investment in LLCB have fluctuated in the past due to changes in prices, production and costs and are expected to continue to do so in the future as market conditions change.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in this Annual Report for information concerning recent accounting pronouncements.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Borrowings under the Farm Credit West Credit Facility and Farm Credit West Term Loans are or will be subject to variable interest rates. These variable interest rates subject us to the risk of increased interest costs associated with any upward movements in interest rates. For the Farm Credit West Credit Facility and Farm Credit West Term Loans, our borrowing interest rate is 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%. At October 31, 2021, our total debt outstanding under the Farm Credit West Credit Facility and the Farm Credit West Term Loans was $111.3 million and $18.2 million, respectively.
From time to time we enter into interest rate swap agreements to manage risks and costs associated with our financing activities.
Based on our level of borrowings at October 31, 2021, a 100 basis points increase in interest rates would increase our interest expense $0.7 million for fiscal year 2022 and an annual average of $0.8 million for the three subsequent fiscal years. Additionally, a 100 basis points increase in the interest rate would decrease our net income by $0.5 million for fiscal year 2022 and an annual average of $0.6 million for the three subsequent fiscal years. Refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information.
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Item 8. Financial Statements and Supplementary Data
Limoneira Company
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 44
Consolidated Financial Statements of Limoneira Company
Notes to Consolidated Financial Statements 52
All schedules are omitted for the reason that they are not applicable or the required information is included in the Consolidated Financial Statements or the notes thereto.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Limoneira Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Limoneira Company and subsidiaries (the "Company") as of October 31, 2021 and 2020, the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity and temporary equity, and cash flows, for each of the three years in the period ended October 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, based on our audits and the report of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We did not audit the financial statements of Limoneira Lewis Community Builders, LLC (“LLCB”), the Company's investment in which is accounted for by use of the equity method. The accompanying consolidated financial statements of the Company include, before the basis difference and related amortization discussed in Note 8, its equity investment in LLCB of $51,416,000 and $46,908,000 as of October 31, 2021 and 2020, respectively, and its equity earnings in LLCB of $4,508,000, $1,386,000 and $4,368,000 for the years ended October 31, 2021, 2020 and 2019, respectively. The financial statements of LLCB were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Company’s equity investment and equity earnings in LLCB, is based on the report of the other auditors.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31, 2021, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 10, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Real Estate Development – Impairment Indicators – Refer to Notes 2, 5, 7 and 8 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of real estate development, as held by the Company or as included specifically within its investment in Limoneira Lewis Community Builders, LLC (“LLCB”), for impairment involves an initial assessment of each real estate
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development to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of, or investment in, real estate development are no longer recoverable. Possible indications of impairment may include events or changes in circumstances affecting the entitlement process, zoning, government regulation, geographical demand for new housing or commercial property, and market conditions related to pricing of residential or commercial land lots. When events or changes in circumstances exist, the Company further evaluates the real estate development for impairment by a) comparing undiscounted future cash flows expected to be generated over the life of the real estate development to the respective carrying amount for its own real estate development or b) determining if its equity in investment has incurred an other-than-temporary decline.
The Company makes significant judgments in evaluating real estate development for possible indications of impairment. These judgments may relate to the identification of appropriate and comparable market prices, the consideration of changes to legal factors or the business climate, the likelihood of successfully completing the entitlement process, changes in zoning or government regulation, and demand for new housing. Changes in these judgments could have a significant impact on real estate development. Real estate development assets were $22,828,000, and equity in investment in LLCB was $60,216,000 as of October 31, 2021. For the year ended October 31, 2021, no impairment loss has been recognized on any real estate development and no other-than-temporary-impairment has been recognized on the Company’s equity in LLCB.
We identified the management judgments used in the determination of impairment indicators for real estate development as a critical audit matter due to their significance and because of the subjectivity used by management when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of, or investment in, real estate development may not be recoverable. This required a high degree of auditor judgment when performing audit procedures to evaluate whether management appropriately identified impairment indicators.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of real estate development for possible indications of impairment included the following, among others:
•We tested the effectiveness of the controls over management’s identification of possible circumstances that may indicate that real estate development is no longer recoverable, including controls over management’s evaluation of the entitlement process, litigation, changes in zoning, government regulation, geographical demand for new housing or commercial property and market conditions related to pricing of residential or commercial land lots.
▪We evaluated management’s impairment analysis by:
◦Searching for adverse asset-specific and/or market conditions by reviewing publicly available information on home values and land values in the surrounding regions of the development, periodicals and news information relating to the Southern California housing market, other independent market data, including considerations of the demand for housing in the market and changes to comparable home prices
◦Obtaining information from legal counsel and performing inquiries with management in order to evaluate any changes in the status of litigation matters affecting the development properties and the potential impact on the ability to recover the accumulated costs, including any relevant government regulations and/or other matters impacting the entitlement process
◦With the assistance of our fair value specialists, we evaluated comparable land sales for both commercial and residential lots in the area as well as cost to develop residential lot information and compared it to information used by management
◦Developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis
/s/ Deloitte & Touche LLP
Los Angeles, California
January 10, 2022
We have served as the Company’s auditor since 2019.
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LIMONEIRA COMPANY
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share amounts)
October 31,
Assets
Current assets:
Prepaid expenses and other current assets 10,709 10,688
Receivables/other from related parties 5,958 2,294
Income taxes receivable — 5,911
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt 2,472 3,277
Long-term liabilities:
Commitments and contingencies — —
Stockholders' equity:
Accumulated other comprehensive loss (5,733) (7,548)
Total liabilities and stockholders' Equity $ 392,276 $ 389,600
See Notes to Consolidated Financial Statements.
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LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except share amounts)
Years Ended October 31,
Net revenues:
Costs and expenses:
Other income (expense):
Interest expense, net of patronage dividends (1,501) (2,048) (2,341)
Loss on stock in Calavo Growers, Inc. — (6,299) (2,117)
Loss (income) attributable to noncontrolling interest 456 1,506 (477)
Net loss attributable to Limoneira Company (3,441) (16,435) (5,943)
Net loss applicable to common stock $ (3,942) $ (16,936) $ (6,444)
Basic net loss per common share $ (0.23) $ (0.96) $ (0.37)
Diluted net loss per common share $ (0.23) $ (0.96) $ (0.37)
See Notes to Consolidated Financial Statements.
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LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Years Ended October 31,
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (685) (707) (1,103)
Residual state tax effects on sale of equity securities — 140 —
Total other comprehensive income (loss), net of tax 1,815 (293) (1,710)
Comprehensive loss attributable to noncontrolling interest 445 1,536 438
See Notes to Consolidated Financial Statements.
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LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY
($ in thousands)
Stockholders’ Equity Temporary Equity
Shares Amount Capital Earnings Income (Loss) Stock Interest Total Stock Stock
Dividends - common ($0.30 per share) — — — (5,331) — — — (5,331) — —
Dividends - Series B ($8.75 per share) — — — (129) — — — (129) — —
Dividends - Series B-2 ($40 per share) — — — (372) — — (372) — —
Exchange of common stock (36,692) — (606) — — — — (606) — —
Acquired noncontrolling interest — — — — — — 14,410 14,410 — —
Other comprehensive loss, net of tax — — — — (1,710) — (39) (1,749) — —
Reclassification upon adoption of ASU 2018-02 — — — (1,411) 1,411 — — — — —
Dividends - common ($0.30 per share) — — — (5,356) — — — (5,356) — —
Dividends - Series B ($8.75 per share) — — — (129) — — — (129) — —
Dividends - Series B-2 ($40 per share) — — — (372) — — — (372) — —
Exchange of common stock (11,314) — (213) — — — — (213) — —
Noncontrolling interest adjustment — — — — — — (145) (145) — —
Other comprehensive loss, net of tax — — — — (293) — (30) (323) — —
Dividends - common ($0.30 per share) — — — (5,303) — — — (5,303) — —
Dividends - Series B ($8.75 per share) — — — (129) — — — (129) — —
Dividends - Series B-2 ($40 per share) — — — (372) — — — (372) — —
Exchange of common stock (46,993) (1) (700) — — — — (701) — —
Noncontrolling interest adjustment — — — — — — (1,331) (1,331) — —
Other comprehensive (loss) income, net of tax — — — — 1,815 — 11 1,826 — —
See Notes to Consolidated Financial Statements
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LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended October 31,
Operating activities
Non-cash lease expense 520 470 —
Equity in earnings of investments, net (3,203) (339) (3,073)
Cash distributions from equity investments 219 — 351
Loss on stock in Calavo Growers, Inc. — 6,299 2,117
Changes in operating assets and liabilities, net of business combinations:
Prepaid expenses and other current assets (1,021) (44) (2,548)
Accounts payable and growers and suppliers payable 5,389 (5,545) 3,392
Accrued liabilities and payables to related parties (730) (685) 1,459
Net cash provided by (used in) operating activities 9,605 (11,317) 1,365
Investing activities
Net proceeds from sales of real estate development assets — — 2,886
Agriculture property acquisition — — (397)
Business combination — — (15,000)
Net proceeds from sale of stock in Calavo Growers, Inc. — 11,048 4,785
Loan to Limoneira Lewis Community Builders, LLC — (1,800) —
Collection on loan and note receivable 25 1,800 150
Equity investment contributions — (2,800) (4,000)
Cash distribution from equity investment 106 — 283
Investments in mutual water companies and water rights (653) (64) (472)
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LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Years Ended October 31,
Financing activities
Principal paid on finance lease (18) — —
Purchase of treasury stock — (3,493) —
Payments of deferred financing costs — (66) (35)
Effect of exchange rate changes on cash 36 (5) (137)
Net (decrease) increase in cash (62) (115) 7
Supplemental disclosures of cash flow information
Non-cash investing and financing activities:
Non-cash reduction of note receivable $ — $ — $ 89
Capital expenditures accrued but not paid at year-end $ 657 $ 4,269 $ 1,333
In December 2018, the Company terminated its lease agreement with LLCB (as defined herein) that is developing the East Area I real estate development project. As a result, the Company reduced its sale lease-back deferral and corresponding real estate development by $58,330,000 and reclassified $33,353,000 of the Company’s basis in the joint venture from real estate development to equity in investments as further described in Note 7 - Real Estate Development and Note 8 - Equity in Investments of the notes to consolidated financial statements included in this Annual Report.
See Notes to Consolidated Financial Statements.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Limoneira Company (together with its consolidated subsidiaries, the “Company”)engages primarily in growing citrus and avocados, picking and hauling citrus, and packing, marketing and selling lemons. The Company is also engaged in residential rentals and other rental operations and real estate development activities.
The Company markets and sells lemons directly to food service, wholesale and retail customers throughout the United States, Canada, Asia, Europe and other international markets. The Company is a member of Sunkist Growers, Inc. (“Sunkist”), an agricultural marketing cooperative, and sells its oranges, specialty citrus and other crops to Sunkist-licensed and other third-party packinghouses.
The Company sells the majority of its avocado production to Calavo Growers, Inc. (“Calavo”), a packing and marketing company listed on the NASDAQ Global Select Market under the symbol CVGW. Calavo’s customers include many of the largest retail and food service companies in the United States and Canada. Calavo packs the Company's avocados, which are then sold and distributed under Calavo brands to its customers.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the accounts of all the subsidiaries and investments in which the Company holds a controlling interest. The consolidated financial statements represent the consolidated balance sheets, statements of operations, statements of comprehensive loss, statements of stockholders’ equity and temporary equity and statements of cash flows of Limoneira Company and consolidated subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The Company considers the criteria established under the Financial Accounting Standards Board (“FASB”) – Accounting Standards Code (“ASC”) 810, Consolidations, and the effect of variable interest entities, in its consolidation process.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
The Company grants credit in the course of its operations to cooperatives, companies and lessees of the Company’s facilities. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company provides allowances on its receivables as required based on accounts receivable aging and other factors. At October 31, 2021 and 2020 the allowances totaled $444,000 and $812,000, respectively. For fiscal years 2021, 2020 and 2019, credit losses were insignificant.
Concentrations and Geographic Information
The Company sells the majority of its avocado production to Calavo. Sales of avocados to Calavo were $6,594,000, $8,806,000 and $3,080,000 in fiscal years 2021, 2020 and 2019, respectively. The Company sells the majority of its oranges and specialty citrus to a third-party packinghouse.
Concentrations of credit risk with respect to revenues and trade receivable are limited due to a large, diverse customer base. Two customers each represented 10% of revenue for the year ended October 31, 2021 and one customer represented 10% of revenue for the year ended October 31, 2020. No individual customer represented more than 10% of accounts receivable, net as of October 31, 2021 and one customer represented more than 10% of accounts receivable, net as of October 31, 2020.
Lemons procured from third-party growers were approximately 52%, 60% and 60% of the Company's lemon supply in fiscal years 2021, 2020 and 2019, respectively. One third-party grower was 46% and 39% of grower payable at October 31, 2021 and 2020, respectively.
The Company maintains its cash in federally insured financial institutions. The account balances at these institutions periodically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of risk related to amounts on deposit in excess of FDIC insurance coverage.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Concentrations and Geographic Information (continued)
During fiscal years 2021, 2020 and 2019, the Company had approximately $2,976,000, $3,521,000 and $3,204,000, respectively, of total sales in Chile by Fruticola Pan de Azucar S.A. (“PDA”) and Agricola San Pablo SpA. ("San Pablo").
During fiscal years 2021, 2020 and 2019, the Company had approximately $3,633,000, $14,150,000 and $14,651,000, respectively, of total sales in Argentina by Trapani Fresh.
The majority of the Company's avocados, oranges and specialty citrus and other crops are sold to packinghouses and processors located in the United States. Most of its long-lived assets are located within the United States. Long-lived assets, net of accumulated depreciation, located in Chile were $14,322,000 and $15,261,000 as of October 31, 2021 and 2020, respectively, and located in Argentina were $19,700,000 and $18,576,000 as of October 31, 2021 and 2020, respectively.
Cultural 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. Harvest costs are comprised of labor and equipment expenses incurred to harvest and deliver crops to the packinghouses.
Certain of the Company's crops have distinct growing periods and distinct harvest and selling periods, each of which lasts approximately four to eight months. During the growing period, cultural costs are capitalized as they are associated with benefiting and preparing the crops for the harvest and selling period. During the harvest and selling period, harvest costs and cultural costs are expensed when incurred and capitalized cultural costs are amortized as components of agribusiness costs and expenses.
Due to climate, growing conditions and the types of crops grown, certain of the Company's other crops may be harvested and sold on a year-round basis. Accordingly, the Company does not capitalize cultural costs associated with these crops and therefore such costs, as well as harvest costs associated with these crops, are expensed to operations when incurred as components of agribusiness costs and expenses.
Most cultural costs, including amortization of capitalized cultural costs, and harvest costs are associated with and charged to specific crops. Certain other costs, such as property taxes, indirect labor, including farm supervision and management, and irrigation that benefit multiple crops are allocated to crops on a per acre basis.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Property, Plant and Equipment
Property, plant and equipment is stated at original cost, net of accumulated depreciation. Depreciation is computed using the straight-line method at rates based upon the estimated useful lives of the related assets as follows (in years):
Land improvements 10 – 30
Buildings and building improvements 10 – 50
Equipment 5 – 20
Orchards and vineyards 20 – 40
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LIMONEIRA COMPANY