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 2023 compared to fiscal year 2022. For discussion related to the results of operations and changes in financial condition for fiscal year 2022 compared to fiscal year 2021 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2022 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on December 22, 2022.
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 11,100 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, other crops and farm management services. 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 238 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 2023 Highlights and Recent Developments”
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Results of Operations
The following table shows the results of operations ($ in thousands):
Years Ended October 31,
Net revenues:
Costs and expenses:
(Gain) loss on disposal of assets, net (28,849) (17) % (4,500) (2) % 109 — %
Gain on legal settlement (2,269) (1) % — — % — — %
Operating income (loss):
Gain on legal settlement 2,269 — —
Other income (expense):
Interest expense, net of patronage dividends (494) (2,291) (1,501)
Income (loss) before income tax (provision) benefit 13,364 349 (4,163)
Net loss attributable to noncontrolling interest 283 238 456
Net income (loss) attributable to Limoneira Company $ 9,400 $ (236) $ (3,441)
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 stock-based compensation, named executive officer cash severance, pension settlement cost, (gain) loss on disposal of assets, net, cash bonus related to sale of assets and gain on legal settlement are important measures to evaluate our results of operations between periods on a more comparable basis. Adjusted EBITDA in fiscal year 2021 did not exclude stock-based compensation which has now been excluded as management believes this is a better representation of cash generated by operations and is consistent with peer company reporting. Adjusted EBITDA for fiscal year 2021 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 income (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 income (loss) attributable to Limoneira Company $ 9,400 $ (236) $ (3,441)
Interest expense, net of patronage dividends 494 2,291 1,501
Named executive officer cash severance — 432 —
Cash bonus related to sale of assets 2,000 — —
Gain on legal settlement (2,269) — —
Fiscal Year 2023 Compared to Fiscal Year 2022
Revenues
Total net revenues for fiscal year 2023 were $179.9 million compared to $184.6 million for fiscal year 2022. The 3% decrease of $4.7 million was primarily due to decreased avocados and oranges agribusiness revenues, partially offset by farm management agribusiness revenues, as detailed below (in thousands):
Years Ended October 31,
•Lemons: The decrease in fiscal year 2023, compared to fiscal year 2022, was primarily due to decreased fresh lemon sales, partially offset by increased brokered lemons and other lemon sales. During fiscal years 2023 and 2022, fresh lemon sales were $86.8 million and $92.9 million, in aggregate, on 4.8 million and 4.9 million cartons of lemons sold at average per carton prices of $18.24 and $18.77, respectively. Lemon revenues in fiscal years 2023 and 2022 included brokered lemons and other lemon sales of $30.3 million and $24.5 million, shipping and handling of $20.6 million and $22.2 million, and lemon by-product sales of $3.0 million and $3.5 million, respectively. In addition, lemon revenues included settlement proceeds of $1.4 million allocated to lemons in fiscal year 2023.
•Avocados: The decrease in fiscal year 2023, compared to fiscal year 2022 was primarily due to decreased volume and lower prices of avocados sold. During fiscal years 2023 and 2022, 3.8 million and 8.2 million pounds of avocados were sold at an average per pound price of $1.06 and $2.08, respectively. The California avocado crop typically experiences alternating years of high and low production due to plant physiology. In addition, avocado revenues included settlement proceeds of $2.4 million allocated to avocados and crop insurance proceeds of $0.7 million in fiscal year 2023.
•Oranges: The decrease in fiscal year 2023, compared to fiscal year 2022, was primarily due to decreased volume, mainly related to the Northern Properties sale. During fiscal years 2023 and 2022, 292,000 and 676,000 cartons of oranges were sold at an average per carton price of $19.79 and $14.66, respectively.
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•Specialty citrus and other crops: The increase in fiscal year 2023, compared to fiscal year 2022, was primarily due to higher prices, partially offset by decreased volume of specialty citrus sold. During fiscal years 2023 and 2022, we sold 240,000 and 434,000 40-pound carton equivalents of specialty citrus at an average per carton price of $27.18 and $13.22, respectively. Additionally, during fiscal years 2023 and 2022, we sold $2.9 million and $3.2 million of wine grapes, respectively.
•Farm management: Farm management revenues in fiscal year 2023 were $9.9 million, primarily due to the Northern Properties farming, management and operations services. There were no farm management revenues in fiscal year 2022.
Other operations revenue in fiscal years 2023 and 2022 was $5.5 million and $5.3 million, respectively. The increase in fiscal year 2023, compared to fiscal year 2022, was primarily due to increased leased land revenue.
Costs and Expenses
Our total costs and expenses in fiscal year 2023 were $169.1 million, compared to $182.4 million in the same period of fiscal year 2022. The 7% decrease of $13.3 million was primarily due to increased gain on disposal of assets, mainly related to the Northern Properties sale, partially offset by the loss on disposal of Cadiz Ranch assets and increased agribusiness costs and expenses. Agribusiness costs and expenses are detailed below (in thousands):
Years Ended October 31,
•Packing costs: Packing costs consist primarily 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. In fiscal years 2023 and 2022, lemon packing costs were $45.7 million and $43.0 million, respectively. The increase in fiscal year 2023 was primarily due to higher average per carton costs, partially offset by decreased volume of fresh lemons packed and sold compared to fiscal year 2022. During fiscal years 2023 and 2022, we packed and sold 4.8 million and 4.9 million cartons of lemons at average per carton costs of $9.61 and $8.69, respectively. The increase in average per carton costs in fiscal year 2023, compared to fiscal year 2022, was primarily due to increased labor and benefit costs. Additionally, in fiscal years 2023 and 2022, packing costs included $2.9 million and $2.4 million of shipping costs, respectively.
•Harvest costs: The decrease in harvest costs in fiscal year 2023, compared to fiscal year 2022, was primarily due to decreased volume of avocados, oranges and specialty citrus harvested, partially offset by increased volume of lemons harvested.
•Growing costs: Growing costs, also referred to as cultural costs, consist of orchard maintenance costs such as cultivation, fertilization and soil amendments, pest control, pruning and irrigation. The increase in fiscal year 2023, compared to fiscal year 2022, was primarily due to the Northern Properties farm management costs which were expensed in fiscal year 2023 and were capitalized as cultural costs in fiscal year 2022, as well as 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 other growers and suppliers as well as the cost of brokered fruit is referred to as third-party grower and supplier costs. The increase in fiscal year 2023, compared to fiscal year 2022, was primarily due to increased costs incurred for brokered fruit, partially offset by decreased costs for third-party growers and suppliers' fruit. In fiscal years 2023 and 2022, we incurred costs for purchased, packed fruit for resale of $29.4 million and $26.2 million, respectively. In fiscal years 2023 and 2022, we incurred costs for third-party growers and suppliers' fruit of $31.9 million and $33.4 million, respectively. During fiscal years 2023 and 2022 of the 4.8 million and 4.9 million cartons of lemons packed and sold, 2.6 million (54%) and 2.6 million (52%), were procured from third-party growers and suppliers at average per carton prices of $12.44 and $13.03, respectively.
•Depreciation and amortization: Depreciation and amortization expense for fiscal years 2023 and 2022 was $7.3 million and $8.6 million, respectively. The decrease in fiscal year 2023, compared to fiscal year 2022, was primarily due to the Northern Properties sale in fiscal year 2023.
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Other operations expenses for fiscal years 2023 and 2022 were $4.6 million and $4.4 million, respectively.
Gain on disposal of assets, net in fiscal years 2023 and 2022 were $28.8 million and $4.5 million, respectively. The change is primarily due to the gain on the sale of the Northern Properties, partially offset by the loss on disposal of Cadiz Ranch assets in fiscal year 2023.
Gain on legal settlement was $2.3 million in fiscal year 2023 due to the Settlement Agreement related to the Thomas fire.
Selling, general and administrative expenses for fiscal year 2023 were $26.5 million compared to $21.8 million for fiscal year 2022. The $4.7 million increase was primarily due to:
•$2.5 million net increase in salaries, benefits and incentive compensation;
•$0.7 million increase in tax, legal and consulting fees primarily related to disposals of Northern Properties and Cadiz;
•$0.2 million increase in selling expenses; and
•$1.3 million net increase in other selling, general and administrative expenses, primarily associated with our strategic initiatives.
Other Income (Expense)
Total other income (expense) was $2.6 million and $(1.9) million for fiscal years 2023 and 2022, respectively. The $4.4 million increase in total other income was primarily due to:
•$4.0 million increase of equity earnings in investments primarily due to LLCB;
•$1.8 million decrease of interest expense due to decreased long-term debt; and
•$1.7 million increase of other expense primarily due to pension settlement cost.
Income Taxes
We recorded for fiscal years 2023 and 2022 income tax provision of $4.2 million and $0.8 million on pre-tax income of $13.4 million and $0.3 million, respectively. The tax provision recorded for fiscal year 2023 differs from the U.S. federal statutory tax rate of 21.0% due primarily to foreign jurisdictions which are taxed at different rates, state taxes, tax impact of stock-based compensation, nondeductible tax items and valuation allowances on certain deferred tax assets of foreign subsidiaries. Our effective tax rate for fiscal years 2023 and 2022 was 31.8% and 234.8%, respectively.
Net Loss Attributable to Noncontrolling Interest
Net loss attributable to noncontrolling interest represents 10% and 49% of the net loss of PDA and Trapani Fresh, respectively, for fiscal years 2023 and 2022.
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 21 - Segment Information for additional information regarding our operating segments.
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Segment information for fiscal year 2023 (in thousands):
Segment information for fiscal year 2022 (in thousands):
Fiscal Year 2023 Segment Information Compared to Fiscal Year 2022 Segment Information
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, brokered lemons and other lemon revenue. For fiscal years 2023 and 2022, our fresh lemons segment total net revenues were $121.5 million and $120.9 million, respectively. The 1% increase of $0.6 million was primarily due to:
•Fresh lemon sales decrease of $6.2 million;
•Brokered lemons and other lemon sales increase of $5.8 million;
•Lemon by-products decrease of $0.4 million; and
•Legal settlement proceeds in fiscal year 2023 allocated to fresh lemons of $1.4 million.
Costs and expenses associated with our fresh lemons segment include growing costs, harvest costs, cost of lemons 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 years 2023 and 2022, our fresh lemons segment costs and expenses were $120.5 million and $115.1 million, respectively. The 5% increase of $5.4 million was primarily due to:
•Harvest costs increase of $0.3 million;
•Growing costs increase of $3.2 million;
•Third-party grower and supplier costs increase of $0.1 million;
•Transportation costs increase of $0.5 million; and
•Intersegment costs and expenses increase of $1.3 million.
Lemon Packing
Lemon packing segment revenue is comprised of packing revenue, intersegment packing revenue and shipping and handling revenue. For fiscal years 2023 and 2022, our lemon packing segment total net revenues were $51.7 million and $52.0 million, respectively, a 1% decrease of $0.3 million.
Costs and expenses associated with our lemon packing segment 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. For fiscal years 2023 and 2022, our lemon packing costs and expenses were $45.7 million and $43.0 million, respectively. The 6% increase of $2.7 million was primarily due to increased labor and benefit costs.
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Lemon packing segment operating income per carton sold was $1.25 and $1.81 for fiscal years 2023 and 2022, respectively.
The lemon packing segment included $31.1 million and $29.8 million of intersegment revenues for fiscal years 2023 and 2022, respectively, that 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
Our avocados segment revenues were $7.0 million and $17.3 million for fiscal years 2023 and 2022, respectively, a 59% decrease of $10.3 million, due primarily to alternating years of high and low production due to plant physiology.
Costs and expenses associated with our avocados segment include growing and harvest costs. Our avocados segment costs and expenses were $4.0 million and $5.5 million for fiscal years 2023 and 2022, respectively. The 27% decrease of $1.5 million primarily consisted of the following:
•Harvest costs decrease of $0.9 million; and
•Growing costs decrease of $0.6 million.
Other Agribusiness
Our other agribusiness segment total net revenues were $25.2 million and $18.9 million for fiscal years 2023 and 2022, respectively. The 34% increase of $6.3 million was primarily due to:
•Orange revenues decrease of $4.1 million;
•Specialty citrus and other revenues increase of $0.5 million; and
•Farm management revenues in fiscal year 2023 were $9.9 million. There were no farm management revenues in fiscal year 2022.
Costs and expenses associated with our other agribusiness segment include growing costs, harvest costs and purchased fruit costs. Our other agribusiness costs and expenses were $22.7 million and $18.2 million for fiscal years 2023 and 2022, respectively. The 25% increase of $4.5 million was primarily due to:
•Harvest costs decrease of $1.5 million;
•Growing costs increase of $4.4 million; and
•Purchased fruit costs increase of $1.6 million.
Total agribusiness depreciation and amortization expenses were $7.3 million and $8.6 million for fiscal years 2023 and 2022, respectively.
Corporate and Other
Our corporate and other operations revenues were $5.5 million and $5.3 million for fiscal years 2023 and 2022, respectively.
Costs and expenses (gain) in our corporate and other operations were $(1.3) million and $20.6 million for fiscal years 2023 and 2022, respectively, and include selling, general and administrative costs and expenses, gain on disposal of assets, net and gain on legal settlement not allocated to the operating segments. Depreciation and amortization expenses for fiscal years 2023 and 2022 were $1.3 million and $1.2 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.
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Material contractual obligations arising in the normal course of business consist primarily of purchase obligations, long-term fixed rate and variable rate debt and related interest payments and operating and finance leases. See Note 11 - Long-Term Debt and Note 13 - Leases for amounts outstanding as of October 31, 2023, related to debt and leases. Purchase obligations consist of contracts primarily related to packing supplies, 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. We believe our revenue generating operations, distributions from equity investments and credit facilities will generate sufficient cash needed to operate beyond 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
Net cash (used in) provided by operating activities was $(15.9) million and $14.8 million for fiscal years 2023 and 2022, respectively. The significant components of our cash flows (used in) provided by operating activities were as follows:
•Net income (loss) was $9.1 million and $(0.5) million for fiscal years 2023 and 2022, respectively. The components of net income for fiscal year 2023, compared to net loss for fiscal year 2022, consists of an increase in operating income of $8.6 million and an increase in total other income of $4.4 million, offset by an increase in income tax provision of $3.4 million.
•Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
◦Adjustments (used) provided $(22.5) million and $10.0 million for fiscal years 2023 and 2022, respectively, primarily related to depreciation and amortization, gain on disposal of assets, stock compensation expense, equity in earnings of investments, net and deferred income taxes.
◦Changes in operating assets and liabilities (used in) provided by $(2.5) million and $5.3 million of operating cash for fiscal years 2023 and 2022, respectively, primarily related to cultural costs, prepaid expenses/other current assets, accounts payable/growers and suppliers payable, accrued liabilities/payables to related parties, and other long-term liabilities.
Cash Flows from Investing Activities
▪The $90.6 million of net cash provided by investing activities during fiscal year 2023 was comprised primarily of net proceeds from sales of assets of $98.5 million, net proceeds from the sale of real estate development assets of $2.6 million, partially offset by capital expenditures of $10.3 million, primarily related to orchard and vineyard development.
▪The $19.4 million of net cash provided by investing activities during fiscal year 2022 was comprised primarily of net proceeds from sale of assets of $19.3 million, net proceeds from the sale of real estate development assets of $7.9 million, collection on notes receivable of $2.8 million, partially offset by capital expenditures of $10.1 million related to orchard and vineyard development.
Cash Flows from Financing Activities
•The $71.9 million of net cash used in financing activities during fiscal year 2023 was comprised primarily of net repayments of long-term debt $65.0 million and common and preferred stock dividends of $5.9 million.
•The $33.5 million of net cash used in financing activities during fiscal year 2022 was comprised primarily of net repayments of long-term debt of $26.8 million, common and preferred stock dividends of $5.8 million and the exchange of common stock of $1.5 million, partially offset by proceeds from equipment financings of $1.0 million.
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 from our AgWest Farm Credit Facility, which includes the Master Loan Agreement (the “MLA”) and Supplements. In addition, we have Banco de Chile term loans and COVID-19 loans. Additional information regarding these loans can be found in Note 11- Long-Term Debt.
In June 2021, we entered into the MLA with the Lender, together with the Supplements and a Fixed Interest Rate Agreement, which extends the principal repayment to July 1, 2026. The MLA governs the terms of the Supplements.
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The Supplements provide aggregate borrowing capacity of $115.0 million, comprised of $75.0 million under the Revolving Credit Supplement and $40.0 million under the Non-Revolving Credit Supplement. As of October 31, 2023, our outstanding borrowings under the AgWest Farm Credit Facility were $40.0 million and we had $75.0 million of availability.
On January 31, 2023, the Company sold the Northern Properties which resulted in total net proceeds of $98.4 million. The proceeds were used to pay down all of the Company's domestic debt except the Non-Revolving Credit Supplement.
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 specific debt service coverage ratio on an annual basis. In September 2023, the Lender modified the covenant to defer measurement as of October 31, 2023 and resume a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2024.
In fiscal years 2023 and 2022 we received annual patronage dividends of $1.4 million and $1.6 million, respectively, from the Lender.
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 2023 and 2022.
Cash dividends declared in each of the fiscal years 2023 and 2022 totaled $0.30 per common share and such dividends paid totaled $5.4 million in fiscal year 2023 and $5.3 million in fiscal year 2022.
Income Taxes
In fiscal years 2023 and 2022, we paid income taxes of $7.2 million and $0.1 million, 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. The first phase of the project broke ground to commence mass grading in November 2017. Approved project plans currently include approximately 1,500 residential units and site improvements. A total of 707 residential units have closed from the project's inception to October 31, 2023.
In October 2022, we entered into a joint venture with Lewis for the development of our 17-acre East Area I Retained Property. We formed LLCB II as the development entity, contributed our Retained Property to the joint venture and sold a 50% interest to Lewis for approximately $8.0 million. We recorded a gain on the transaction of approximately $4.7 million, of which $0.5 million was deferred.
The joint venture partners will share in the capital contributions to fund project costs until loan proceeds and/or revenues are sufficient to fund the projects. Since inception each partner has made funding contributions of $21.4 million to LLCB and $0.5 million to LLCB II. We expect to receive approximately $123.0 million from LLCB, LLCB II and East Area II over the next seven years of the projects.
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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, 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.
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 - Summary of Significant Accounting Policies.
Impairment of Real Estate Development Projects – We evaluate our real estate development projects, held either by us or as included specifically within our investments in LLCB and LLCB II, 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 projects 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 projects for impairment by a) comparing undiscounted future cash flows expected to be generated over the life of the real estate development projects to the respective carrying amount for our real estate development or b) determining if our 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 investments in LLCB and LLCB II, 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 2023, 2022 and 2021, 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 or LLCB II.
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 investments in LLCB and LLCB II 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.
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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 investments in LLCB and LLCB II, 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 real estate development projects or return on equity of our investments in LLCB and LLCB II 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 for information concerning recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Borrowings under the AgWest Farm Credit Facility are 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 AgWest Farm Credit Facility, our borrowing interest rate is an internally calculated rate based on an AgWest Farm Credit internal method that follows the changing market interest rates and the cost to fund variable-rate loans. Rate changes are expected to be generally the same as the Federal Open Market Committee (the “FOMC”) recommended changes, however the changes may be marginally different than the FOMC's recommendation. As of October 31, 2023, our total debt outstanding under the AgWest Farm Credit Facility was $40.0 million.
Based on our level of borrowings as of October 31, 2023, a 100 basis points increase in interest rates would not materially increase our interest expense for fiscal year 2024 or the three subsequent fiscal years. Additionally, a 100 basis points increase in the interest rate would not materially decrease our net income for fiscal year 2024 or the three subsequent fiscal years. We have strategies in place to manage our exposure to interest rate risk, including the potential early pay down of outstanding debt under the AgWest Farm Credit Facility. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information.
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
Consolidated Balance Sheets as of October 31, 2023 and 2022 46
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.
43
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, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and temporary equity, and cash flows, for each of the three years in the period ended October 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2023, 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 7, its equity in investment in LLCB of $58,282,000 and $52,431,000 as of October 31, 2023 and 2022, respectively, and its equity earnings in LLCB of $5,851,000, $1,015,000, and $4,508,000 for the years ended October 31, 2023, 2022, and 2021, 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 in investment and equity earnings in LLCB, is based solely 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, 2023, 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 December 21, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting based on our audit.
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 assets held by the Company and equity in investment in LLCB – Impairment Indicators – Refer to Notes 2, 6 and 7 to the financial statements
44
Critical Audit Matter Description
The Company’s evaluation of real estate development projects, held either by the Company or as included specifically within its investment in LLCB, 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 projects 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, the Company further evaluates the real estate development projects for impairment by a) comparing undiscounted future cash flows expected to be generated over the life of the real estate development projects to the respective carrying amount for its 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 each real estate development project as held by them or within its 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. Real estate development assets held by the Company were $9,987,000, and equity in investments was $78,816,000 as of October 31, 2023 of which $66,288,000 was allocated to LLCB. For the year ended October 31, 2023, 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 significant judgments made by management in evaluating real estate development assets held by the Company and equity in investment in LLCB, for possible indicators of impairment, as a critical audit matter. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions when determining whether events or changes in circumstances have occurred indicating that the carrying amount of, or investment in, real estate development assets held by the Company and equity in investment in LLCB may not be recoverable and 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 assets held by the Company and equity in investment in LLCB 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 assets held by the Company or equity in investment in LLCB is no longer recoverable, including controls over management’s evaluation of the entitlement process, litigation, changes in zoning, government regulation, geographical demand and market conditions.
•We evaluated management’s impairment analysis by:
–Searching for adverse asset-specific and/or market conditions by reviewing publicly available information on land values in the surrounding regions of the development, periodicals and news information relating to the Southern California real estate market
–Obtaining information from legal counsel and performing inquiries with management in order to evaluate any changes in the status of litigation matters affecting the real estate development assets 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
–Obtaining comparable land sales in the area and comparing such data to information used by management with the assistance of our fair value specialists
–Developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis
/s/ Deloitte & Touche LLP
Los Angeles, California
December 21, 2023
We have served as the Company’s auditor since 2019.
45
LIMONEIRA COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
October 31,
Assets
Current assets:
Prepaid expenses and other current assets 5,588 8,496
Receivables/other from related parties 4,214 3,888
Liabilities, Convertible Preferred Stock and Stockholders' Equity
Current liabilities:
Current portion of long-term debt 381 1,732
Long-term liabilities:
Commitments and contingencies — —
Stockholders' equity:
Accumulated other comprehensive loss (5,666) (7,908)
See Notes to Consolidated Financial Statements.
46
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended October 31,
Net revenues:
Costs and expenses:
Gain on legal settlement (2,269) — —
Other income (expense):
Interest expense, net of patronage dividends (494) (2,291) (1,501)
Income (loss) before income tax (provision) benefit 13,364 349 (4,163)
Net loss attributable to noncontrolling interest 283 238 456
Net income (loss) attributable to Limoneira Company 9,400 (236) (3,441)
Net income (loss) applicable to common stock $ 8,899 $ (737) $ (3,942)
Basic net income (loss) per common share $ 0.50 $ (0.04) $ (0.23)
Diluted net income (loss) per common share $ 0.50 $ (0.04) $ (0.23)
See Notes to Consolidated Financial Statements.
47
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Years Ended October 31,
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 518 (2,430) (685)
Total other comprehensive income (loss), net of tax 2,242 (2,175) 1,815
Comprehensive loss attributable to noncontrolling interest 283 356 445
See Notes to Consolidated Financial Statements.
48
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY
(in thousands, except share data)
Stockholders’ Equity Temporary Equity
Shares Amount Capital Earnings (Loss) Income Stock Interest Equity Stock Stock
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 income, net of tax — — — — 1,815 — 11 1,826 — —
Dividends - common ($0.30 per share) — — — (5,315) — — — (5,315) — —
Dividends - Series B ($8.75 per share) — — — (129) — — — (129) — —
Dividends - Series B-2 ($40 per share) — — — (372) — — — (372) — —
Other comprehensive loss, net of tax — — — — (2,175) — (118) (2,293) — —
Dividends - common ($0.30 per share) — — — (5,382) — — — (5,382) — —
Dividends - Series B ($8.75 per share) — — — (129) — — — (129) — —
Dividends - Series B-2 ($40 per share) — — — (372) — — — (372) — —
Exchange of common stock (39,472) (1) (566) — — — — (567) — —
Noncontrolling interest adjustment — — — — — — (117) (117) — —
Other comprehensive income, net of tax — — — — 2,242 — — 2,242 — —
See Notes to Consolidated Financial Statements.
49
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended October 31,
Operating activities
Gain on legal settlement (853) — —
Equity in earnings of investments, net (5,322) (1,341) (3,203)
Cash distributions from equity investments 220 483 219
Changes in operating assets and liabilities:
Accounts receivable and receivables/other from related parties 815 1,845 (5,076)
Prepaid expenses and other current assets 1,487 (325) (1,021)
Accounts payable and growers and suppliers payable (1,772) 1,853 5,389
Accrued liabilities and payables to related parties (2,921) 3,269 (730)
Other long-term liabilities (2,727) (49) (512)
Net cash (used in) provided by operating activities (15,870) 14,830 9,605
Investing activities
Net proceeds from legal settlement 853 — —
Net proceeds from sale of real estate development assets 2,577 7,917 —
Cash distribution from Trapani Fresh 122 122 —
Equity investment contributions and capitalized interest (847) (48) —
Cash distribution from equity investment — — 106
Investments in mutual water companies and water rights (523) (506) (653)
Financing activities
Proceeds from equipment financings — 1,020 —
Principal paid on finance leases and equipment financings (491) (377) (18)
Net cash (used in) provided by financing activities (71,922) (33,517) 534
Effect of exchange rate changes on cash (11) (328) 36
Net increase (decrease) in cash 2,774 418 (62)
50
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Years Ended October 31,
Supplemental disclosures of cash flow information
Cash paid (received) during the period for income taxes $ 7,229 $ 83 $ (5,911)
Non-cash investing and financing activities:
Contribution of real estate development to equity investment $ — $ 7,975 $ —
Reduction of net payables to related parties $ — $ 2,392 $ —
Reduction of note receivable $ — $ 388 $ —
Capital expenditures accrued but not paid at period-end $ 309 $ 430 $ 657
See Notes to Consolidated Financial Statements.
51
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 citrus. The Company is also engaged in residential rentals and other rental operations and real estate development activities.
The Company markets and sells citrus directly to food service, wholesale and retail customers throughout the United States, Canada, Asia, Australia and other international markets. The Company was a member of Sunkist Growers, Inc., an agricultural marketing cooperative, and sold a portion of its oranges, specialty citrus and other crops to Sunkist-licensed and other third-party packinghouses.
Through fiscal year 2021, the Company sold 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. In February 2022, the Company terminated its Avocado Marketing Agreement and the associated Letter Agreement Regarding Fruit Commitment with Calavo to pursue opportunities with other packing and marketing companies.
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 income (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. As of October 31, 2023 and 2022 the allowances totaled $260,000 and $469,000, respectively. For fiscal years 2023, 2022 and 2021, credit losses were insignificant.
Concentrations and Geographic Information
The Company sells its avocados and oranges, and sold its specialty citrus, to third-party packinghouses. Prior to fiscal year 2022, the Company sold a majority of its avocado production to Calavo. Sales of avocados to Calavo were $6,594,000 in fiscal year 2021.
Concentrations of credit risk with respect to revenues and accounts receivable are limited due to a large, diverse customer base. One individual customer represented 13% of revenue for fiscal year 2023. One individual customer represented 11% of accounts receivable, net as of October 31, 2023.
No individual supplier represented 10% of accounts payable as of October 31, 2023.
Lemons procured from third-party growers were 54%, 52% and 52% of the Company's lemon supply in fiscal years 2023, 2022 and 2021, respectively. One third-party grower was 44% of growers and suppliers payable as of October 31, 2023.
52
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
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.
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
Costs of planting and developing orchards are capitalized until the orchards become commercially productive. Planting costs consist primarily of the costs to purchase and plant nursery stock. Orchard development costs consist primarily of maintenance costs of orchards such as cultivation, pruning, irrigation, labor, pest control and fertilization, and interest costs during the development period. The Company ceases the capitalization of costs and commences depreciation when the orchards become commercially productive and orchard maintenance costs are accounted for as cultural costs as described above.
Capitalized Interest
Interest is capitalized on real estate development projects and significant construction in progress using the weighted average interest rate during the fiscal year. Capitalized interest is included in property, plant, and equipment, equity in investments and real estate development assets in the Company’s consolidated balance sheets.
53
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Real Estate Development Costs
The Company capitalizes the planning, entitlement, construction, development costs and interest associated with its various real estate projects. Costs that are not capitalized, which include property maintenance and repairs, general and administrative and marketing expenses, are expensed as incurred. A real estate development project is considered substantially complete upon the cessation of construction and development activities. Once a project is substantially completed, future costs are expensed as incurred. The Company capitalized costs related to its real estate projects of $281,000 and $637,000 in fiscal years 2023 and 2022, respectively.
Equity in Investments
Investments in unconsolidated joint ventures in which the Company has significant influence but less than a controlling interest, or is not the primary beneficiary if the joint venture is determined to be a Variable Interest Entity (“VIE”), are accounted for under the equity method of accounting and, accordingly, are adjusted for capital contributions, distributions, capitalized interest and the Company’s equity in net earnings or loss of the respective joint venture. The Company evaluates equity method investments for impairment whenever events or changes in circumstances exist that may indicate the investments are no longer recoverable or have incurred an other-than-temporary decline in value.
Long-Lived and Intangible Assets
Intangible assets consist primarily of customer relationships, trade names and trademarks and a non-competition agreement. The Company’s definite-life intangible assets are being amortized on a straight-line basis over their estimated lives ranging from eight to nine years. Acquired water and mineral rights are indefinite-life assets not subject to amortization. Assets held for sale are carried at the lower of cost or fair value less estimated cost to sell.
The Company evaluates long-lived assets, including its property and equipment, real estate development projects and definite-life intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated fair value or undiscounted future cash flows from the use of an asset are less than the carrying value of that asset, a write-down is recorded to reduce the carrying value of the asset to its estimated fair value. The Company evaluates its indefinite-life intangible assets annually or whenever events or changes in circumstances indicate an impairment of the assets’ value may exist.
COVID-19 Pandemic
The decline in demand for the Company's products as a result of the COVID-19 pandemic negatively impacted the Company's sales and profitability since the beginning of the second quarter of fiscal year 2020. The COVID-19 pandemic may continue to impact the Company's sales and profitability in future periods. The duration of these trends and the magnitude of such impacts are uncertain and therefore cannot be estimated at this time, as they are influenced by a number of factors, many of which are outside management’s control.
Goodwill
Goodwill is tested for impairment on an annual basis or when an event or changes in circumstances indicate that its carrying value may not be recoverable. Goodwill impairment is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Goodwill impairment testing involves significant judgment and estimates.
Fair Values of Financial Instruments
Accounts receivable, accounts payable, growers and suppliers payable and accrued liabilities reported on the Company’s consolidated balance sheets approximate their fair values due to the short-term nature of the instruments.
Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of long-term debt is approximately equal to its carrying amount as of October 31, 2023 and 2022.
54
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income (Loss)
Comprehensive income (loss) represents all changes in a company’s net assets, except changes resulting from transactions with stockholders. Other comprehensive income or loss includes foreign currency translation items and defined benefit pension items. Accumulated other comprehensive loss is reported as a component of the Company's stockholders' equity.
The following table summarizes the changes in other comprehensive income (loss) by component at October 31(in thousands):
Minimum pension liability adjustments:
The following table summarizes the changes in accumulated other comprehensive (loss) income by component (in thousands):
Foreign Currency
The Company has foreign subsidiaries whose functional currencies are the Chilean Peso. Their balance sheets are translated to U.S. dollars at exchange rates in effect at the balance sheet date and their income statements are translated at average exchange rates during the reporting period. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive (loss) income.
The Company's foreign subsidiaries incurred aggregate foreign exchange transaction losses of approximately $204,000 in both of the fiscal years 2023 and 2022 and $646,000 for fiscal year 2021. These losses are included in selling, general and administrative expenses in the consolidated statements of operations.
55
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from contracts with customers, and recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve that core principle, the Company applies the following steps:
•Identify the contract(s) with a customer;
•Identify the performance obligations in the contract;
•Determine the transaction price;
•Allocate the transaction price to the performance obligations in the contract;
•Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company determines the appropriate method by which it recognizes revenue by analyzing the nature of the products or services being provided as well as the terms and conditions of contracts or arrangements entered into with its customers. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A contract's transaction price is allocated to each distinct good or service (i.e., performance obligation) identified in the contract and each performance obligation is valued based on its estimated relative standalone selling price.
The Company recognizes the majority of its revenue at a point in time when it satisfies a performance obligation and transfers control of the product to the respective customer. The amount of revenue that is recognized is based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as allowances for estimated customer discounts or concessions, where applicable. The amount of variable consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period.
Agribusiness revenue - Revenue from lemon sales is generally recognized at a point in time when the customer takes control of the fruit from the Company’s packinghouse, which aligns with the transfer of title to the customer. The Company has elected to treat any shipping and handling costs incurred after control of the goods has been transferred to the customer as agribusiness costs.
The Company’s avocados are packed and sold by third-party packinghouses. The Company’s arrangements with its third-party packinghouses are such that the Company is the producer and supplier of the product and the third-party packinghouses are the Company’s customers. The Company controls the product until it is delivered to the third-party packinghouses at which time control of the product is transferred to the third-party packinghouses and revenue is recognized.
Revenue from crop insurance proceeds is recorded when the amount can be reasonably determined and upon establishment of the present right to payment. We recorded agribusiness revenues from crop insurance proceeds of $769,000 and $449,000 in fiscal years 2023 and 2022, respectively. There were no proceeds received in fiscal year 2021.
Advertising Expense
Advertising costs are expensed as incurred. Advertising costs were immaterial in fiscal year 2023 and $165,000 and $178,000 in fiscal years 2022 and 2021, respectively.
Leases
Accounting for Leases as a Lessee - The Company enters into leases as a lessee generally for agricultural land and packinghouse facilities and equipment. The Company determines if an arrangement is a lease or contains a lease at inception. Operating and finance leases are included in other assets, accrued liabilities and other long-term liabilities on its consolidated balance sheets. Lease right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease, measured on a discounted basis. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses either its incremental borrowing rate based on the information available at commencement date, or the rate implicit in the lease, if known, in determining the present value of future payments.
56
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Leases (continued)
Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet as the Company has elected to recognize lease expense for these leases on a straight-line basis over the lease term. The Company had material leases with related parties which are further described in Note 15 - Related-Party Transactions.
Certain of the Company’s agricultural land agreements contain variable costs based on a percentage of the operating results of the leased property. Such variable lease costs are expensed as incurred. These land agreements also contain costs for non-lease components, such as water usage, which the Company accounts for separately from the lease components. For all other agreements, the Company generally combines lease and non-lease components in calculating the ROU assets and lease liabilities. See Note 13 - Leases for additional information.
Accounting for Leases as a Lessor - Leases in which the Company acts as the lessor include land, residential and commercial units and are all classified as operating leases. Certain of the Company’s contracts contain variable income based on a percentage of the operating results of the leased asset. Certain of the Company’s contracts contain non-lease components such as water, utilities and common area services. The Company has elected to not separate lease and non-lease components for its lessor arrangements and the combined component is accounted for entirely under ASC 842, Leases. The underlying asset in an operating lease arrangement is carried at depreciated cost within property, plant, and equipment, net on the consolidated balance sheets. Depreciation is calculated using the straight-line method over the useful life of the underlying asset. The Company recognizes operating lease revenue on a straight-line basis over the lease term.
Basic and Diluted Net Income (Loss)per Share
Basic net income (loss) per common share is calculated using the weighted-average number of common shares outstanding during the period without consideration of the dilutive effect of conversion of preferred stock. Diluted net income (loss) per common share is calculated using the weighted-average number of common shares outstanding during the period plus the dilutive effect of conversion of unvested, restricted stock and preferred stock.
Diluted net income (loss) per common share is calculated using the more dilutive method of either the two-class method or the treasury stock method. Unvested stock-based compensation awards that contain non-forfeitable rights to dividends as participating shares are included in computing earnings per share. The Company’s unvested, restricted stock awards qualify as participating shares.
Defined Benefit Retirement Plan
The Company sponsored a defined benefit retirement plan (the “Plan”) that was frozen in June 2004, and no future benefits accrued to participants subsequent to that time. In fiscal year 2021, the Company terminated the Plan effective December 31, 2021. On November 4, 2022, the Company entered into an agreement with Principal Life Insurance Company for the purchase of an annuity contract in connection with the Plan termination. On November 10, 2022, the annuity contract was purchased for $12,617,000, payable with Plan assets and a $2,500,000 cash payment from the Company.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Asset Sales and Disposals
Northern Properties
In October 2022, the Company entered into a Purchase and Sale Agreement, as amended, (the “Agreement”) with PGIM Real Estate Finance, LLC (“PGIM”) to sell 3,537 acres of land and citrus orchards in Tulare County, California (the “Northern Properties”) for a purchase price of approximately $100,405,000. On January 25, 2023, the Board approved the Agreement creating a binding agreement of the Company to sell the Northern Properties and the transaction closed on January 31, 2023. During the quarter ended April 30, 2023, the purchase price was decreased by $397,000 for reimbursement of certain cultural costs and prepaid expenses, resulting in a final purchase price of $100,008,000. After transaction costs the Company received net proceeds of $98,411,000.
The following is a summary of the transaction (in thousands):
Net cash proceeds received $ 85,494
Debt directly repaid through the transaction 12,917
Total net proceeds received 98,411
Less: net book value of assets sold
Prepaid expenses and other current assets 155
Property, plant and equipment, net 53,144
Intangible assets, net 12
Accrued liabilities (68)
Gain on disposal of assets $ 39,995
The proceeds were used to pay down all of the Company’s domestic debt except the AgWest Farm Credit $40,000,000 non-revolving line of credit. The Northern Properties component, including an allocation of interest expense related to the debt directly repaid through the transaction, had a pretax (loss) gain of $(1,667,000), $(1,236,000) and $3,334,000 for fiscal years 2023, 2022 and 2021, respectively.
On January 31, 2023, the Company entered into a Farm Management Agreement (“FMA”) with an affiliate of PGIM to provide farming, management and operations services related to the Northern Properties. The FMA has an initial term expiring March 31, 2024, and thereafter continuing from year to year unless earlier terminated under the terms of the FMA. Further, on January 31, 2023, the Company entered into a Grower Packing and Marketing Agreement to provide packing, marketing and selling services for lemons harvested on the Northern Properties for a minimum five-year term, subject to certain benchmarking standards.
Cadiz Ranch
In April 2023, the Company determined that citrus farming operations were economically unviable on 670 acres of leased agricultural land at the Cadiz Ranch. As a result, the Company ceased farming operations, disposed of the related property, plant and equipment and recorded a loss on disposal of assets of $9,012,000 during fiscal year 2023.
Oxnard Lemon
In October 2022, the Company sold the Oxnard Lemon property and packing facility located in Ventura County, California. The Company received net proceeds of $19,144,000 and recognized a gain of approximately $846,000, which is included in (gain) loss on disposal of assets, net in the consolidated statements of operations. Concurrent with the closing of the sale, the Company entered into a lease agreement to continue use of the property as a lessee for a period of 36 months from the closing date, with extension options for an additional 24 months.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following as of October 31 (in thousands):
Prepaid supplies and insurance $ 1,667 $ 2,958
Income tax receivable 816 —
5. Property, Plant and Equipment
Property, plant and equipment consist of the following as of October 31 (in thousands):
Depreciation expense was $7,701,000, $9,075,000 and $8,883,000 for fiscal years 2023, 2022 and 2021, respectively.
Refer to Note 3 - Asset Sales and Disposals for discussion on the Company's significant property, plant and equipment transactions.
6. Real Estate Development
Real estate development assets are comprised of land and land development costs for the East Area II property in the amount of $9,987,000 and $9,706,000 as of October 31, 2023 and 2022, respectively.
East Area I, Retained Property and East Area II
In fiscal year 2005, the Company began capitalizing the costs of two real estate development projects east of Santa Paula, California, for the development of 550 acres of land into residential units, commercial buildings and civic facilities. In November 2015 (the “Transaction Date”), the Company entered into a joint venture with The Lewis Group of Companies (“Lewis”) for the residential development of its East Area I real estate development project. To consummate the transaction, the Company formed Limoneira Lewis Community Builders, LLC (“LLCB”) as the development entity, contributed its East Area I property to LLCB, and sold a 50% interest to Lewis for $20,000,000.
The Company and LLCB also entered into a Retained Property Development Agreement on the Transaction Date (the “Retained Property Agreement”). Under the terms of the Retained Property Agreement, LLCB transferred certain contributed East Area I property, which is entitled for commercial development, back to the Company (the “Retained Property”) and arranged for the design and construction of certain improvements to the Retained Property, subject to certain reimbursements by the Company. The balance in East Area II includes estimated costs incurred by and reimbursable to LLCB of $3,444,000 as of October 31, 2023 and 2022, which is included in payables to related parties.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Real Estate Development (continued)
In January 2018, LLCB entered into a $45,000,000 unsecured Line of Credit Loan Agreement and Promissory Note (the “Loan”) with Bank of America, N.A. to fund early development activities. Effective as of February 22, 2023, the Loan maturity date was extended to February 22, 2024, and the maximum borrowing amount was reduced to $35,000,000. As of February 1, 2023, the interest rate on the Loan transitioned from the London Interbank Offered Rate (“LIBOR”) to the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus 2.85% and is payable monthly. The Loan contains certain customary default provisions and LLCB may prepay any amounts outstanding under the Loan without penalty. The Loan had no outstanding balance of as of October 31, 2023.
In February 2018, the Company and certain principals from Lewis guaranteed the obligations under the Loan. The guarantors are jointly and severally liable for all Loan obligations in the event of default by LLCB. The guarantee continues in effect until all of the Loan obligations are fully paid and the Loan terminates. The $1,080,000 estimated value of the guarantee was recorded in the Company’s consolidated balance sheets and is included in other long-term liabilities with a corresponding value in equity in investments. Additionally, a Reimbursement Agreement was executed between the Lewis guarantors and the Company, which provides for unpaid liabilities of LLCB to be shared pro-rata by the Lewis guarantors and the Company in proportion to their percentage interest in LLCB.
In October 2022, the Company entered into a joint venture with Lewis for the development of the Retained Property. The Company formed LLCB II, LLC (“LLCB II”) as the development entity, contributed the Retained Property to the joint venture and sold a 50% interest to Lewis for $7,975,000. After transaction costs, the Company received net proceeds of $7,917,000 and recorded a gain on the transaction of $4,652,000, of which $465,000 was deferred and $4,187,000 is included in (gain) loss on disposal of assets, net in the consolidated statements of operations for fiscal year 2022. The joint venture partners will share in the capital contributions to fund project costs until loan proceeds and/or revenues are sufficient to fund the project. In connection with the closing, the Company and Lewis amended LLCB’s Limited Liability Company Agreement to provide that LLCB is to include the processing of final approval for additional residential units to be developed and constructed on the Retained Property. The Company made contributions of $525,000 to LLCB II in fiscal year 2023.
Through October 31, 2023, LLCB has closed on lot sales representing 707 residential units since inception, including 121 residential units in fiscal year 2023.
Other Real Estate Development Projects
In fiscal year 2020, the Company entered into an agreement to sell its Sevilla property for $2,700,000, which closed in November 2022. After transaction and other costs, the Company received cash proceeds of approximately $2,577,000 and recorded an immaterial loss on disposal of assets during fiscal year 2023.
In December 2017, the Company sold its Centennial property with a net book value of $2,983,000 for $3,250,000. The Company received cash and a $3,000,000 promissory note secured by the property for the balance of the purchase. In fiscal year 2022, the promissory note was paid in full and the deferred gain of $161,000 was recorded in (gain) loss on disposal of assets, net.
7. Equity in Investments
Limco Del Mar, Ltd.
The Company has a 1.3% interest in Limco Del Mar, Ltd. (“Del Mar”) as a general partner and a 26.8% interest as a limited partner. Based on the terms of the partnership agreement, the Company may be removed as general partner without cause from the partnership upon the vote of the limited partners owning an aggregate of 50% or more interest in the partnership. Since the Company has significant influence, but less than a controlling interest, the Company’s investment in Del Mar is accounted for using the equity method of accounting.
The Company provides Del Mar with farm management, orchard land development and accounting services and received expense reimbursements of $206,000, $202,000 and $200,000 in fiscal years 2023, 2022 and 2021, respectively. Del Mar markets lemons through the Company pursuant to its customary marketing agreements and the amount of lemons procured from Del Mar was $1,161,000, $1,568,000 and $1,681,000 in fiscal years 2023, 2022 and 2021, respectively. Fruit proceeds due to Del Mar were $347,000 and $703,000 as of October 31, 2023 and 2022, respectively, and are included in growers and suppliers payable in the accompanying consolidated balance sheets.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Equity in Investments (continued)
Romney Property Partnership
In May 2007, the Company and an individual formed the Romney Property Partnership (“Romney”) for the purpose of owning and leasing an office building and adjacent lot in Santa Paula, California. The Company paid $489,000 in 2007 for 75% interest in Romney. The terms of the partnership agreement affirm the status of the Company as a noncontrolling investor in the partnership since the Company cannot exercise unilateral control over the partnership. Since the Company has significant influence, but less than a controlling interest, the Company’s investment in Romney is accounted for using the equity method of accounting. Net profits, losses and cash flows of Romney are shared by the Company, which receives 75% and the individual, who receives 25%.
Rosales S.A.
The Company currently has a 47% equity interest in Rosales S.A. (“Rosales”) of which 35% was acquired in fiscal year 2014 and an additional 12% interest was acquired with the purchase of Fruticola Pan de Azucar S.A. (“PDA”) in fiscal year 2017. Rosales is a citrus packing, marketing and sales business located in La Serena, Chile. In addition, the Company has the right to acquire the interest of the majority shareholder of Rosales upon death or disability of Rosales’ general manager for the fair value of the interest on the date of the event as defined in the shareholders’ agreement. Since the Company has significant influence, but less than a controlling interest, the Company’s investment in Rosales is accounted for using the equity method of accounting.
Rosales’ functional currency is the Chilean Peso. The following financial information has been translated to U.S. dollars. In addition, as a result of the Company’s acquisition of its equity interest, basis differences were identified between the historical cost of the net assets of Rosales and the proportionate fair value of the net assets acquired. Such basis differences aggregated to $1,683,000 on the acquisition date and are primarily comprised of intangible assets, including $343,000 of equity method goodwill. An additional $925,000 of basis differences were identified with the February 2017 PDA acquisition, including $143,000 of equity method goodwill. The $2,122,000 in basis differences exclusive of goodwill is being amortized over the estimated life of the underlying intangible assets as a reduction in the equity investment and an expense included in equity in earnings of investments. Amortization amounted to $87,000, $118,000 and $180,000 for fiscal years 2023, 2022 and 2021, respectively, and is estimated to be immaterial thereafter.
The Company recognized $4,581,000, $3,615,000 and $3,405,000 of lemon sales to Rosales in fiscal years 2023, 2022 and 2021, respectively. The aggregate amount of lemons and oranges procured from Rosales was $5,826,000, $3,821,000 and $5,304,000 in fiscal years 2023, 2022 and 2021, respectively. Net amounts due from Rosales were $626,000 and $270,000 as of October 31, 2023 and 2022, respectively, and are included in receivables/other from related parties and payables to related parties.
Limoneira Lewis Community Builders, LLC (“LLCB”)
As described in Note 6 – Real Estate Development, the Company has a joint venture with Lewis for the residential development of its East Area I real estate development project. In addition to the assessment performed by the Company of its investment in LLCB under the requirements of Regulation S-X Rule 4-08(g), the Company also assessed its investment in LLCB under the requirements of Regulation S-X Rule 3-09(b). LLCB was deemed significant for the years ended October 31, 2023 and 2021 but was not significant for the year ended October 31, 2022. Therefore, the audited financial statements of LLCB for the years ended October 31, 2023, 2022 and 2021 are provided as exhibits to this document to comply with this rule. Additionally, there is a basis difference between the Company’s historical investment in the project and the amount recorded in members’ capital by LLCB of $58,282,000 as of October 31, 2023. The basis difference of $8,006,000 as of October 31, 2023 is primarily comprised of capitalized interest, amounts related to the loan guarantee and certain other costs incurred by Limoneira Company during the development period. This basis difference is being amortized as lots are sold utilizing the relative sales value method and the amount amortized totaled $717,000, $77,000 and $1,434,000 in fiscal years 2023, 2022 and 2021, respectively. The Company's share of LLCB's net income prior to basis amortization was $5,851,000, $1,015,000 and $4,508,000 for fiscal years 2023, 2022 and 2021, respectively.
LLCB II, LLC (“LLCB II”)
As described in Note 6 - Real Estate Development, in October 2022, the Company formed a joint venture with Lewis for the residential development of its Retained Property. Control is shared with Lewis, therefore the Company's investment in LLCB II is accounted for using the equity method of accounting.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Equity in Investments (continued)
The following is financial information of the equity method investees for fiscal years 2023, 2022 and 2021 (in thousands):
2023 Del Mar Romney Rosales LLCB LLCB II
Non-current liabilities $ — $ — $ 1,085 $ — $ —
Non-current liabilities $ — $ — $ 1,686 $ — $ —
The Company’s investment and equity in earnings (losses) of the equity method investees are as follows (in thousands):
Del Mar Romney Rosales LLCB LLCB II Total
Foreign currency adjustments — — (20) — — (20)
Cash distributions (483) — — — — (483)
Investment contributions — — — — 8,023 8,023
Foreign currency adjustments — — (98) — — (98)
Cash distributions (220) — — — — (220)
Cash contributions — — — — 525 525
Capitalized interest — — — — 322 322
Foreign currency adjustments — — 12 — — 12
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Goodwill and Intangible Assets
A summary of the change in the carrying amount of goodwill is as follows (in thousands):
Goodwill Carrying Amount
Foreign currency translation adjustment (21)
Foreign currency translation adjustment 6
Goodwill is tested for impairment on an annual basis or when an event or changes in circumstances indicate that its carrying value may not be recoverable. The Company concluded that no potential impairment indicators existed during any interim period and performed its annual assessment of goodwill impairment as of July 31, 2023 with no impairment noted. The Company did not incur any goodwill impairment losses in fiscal years 2023, 2022 or 2021, as the estimated fair values of its reporting units were in excess of their carrying values.
As of October 31, 2023, the Company allocated goodwill to its reportable segments as follows: Fresh Lemons $942,000 and Lemon Packing $570,000, respectively.
Intangible assets consist of the following as of October 31 (in thousands):
Amortization expense totaled $730,000, $723,000, and $929,000 for fiscal years 2023, 2022 and 2021, respectively.
Estimated future amortization expense of intangible assets are as follows (in thousands):
9. Other Assets
Investments in Mutual Water Companies
The Company’s investments in various not-for-profit mutual water companies provide it with the right to receive a proportionate share of water from each of the not-for-profit mutual water companies that have been invested in and do not constitute voting shares and/or rights. In January 2023, the Company sold an investment in a mutual water company with a net book value of $1,320,000 as part of the Northern Properties sale described in Note 3 - Asset Sales and Disposals. Amounts included in other assets in the consolidated balance sheets as of October 31, 2023 and 2022 were $5,703,000 and $6,500,000, respectively.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Accrued Liabilities
Accrued liabilities consist of the following as of October 31 (in thousands):
11. Long-Term Debt
Long-term debt is comprised of the following as of October 31 (in thousands):
Less deferred financing costs, net of accumulated amortization — 94
The Company entered into a Master Loan Agreement (the “MLA”) with AgWest Farm Credit, formerly known as Farm Credit West, (the “Lender”) dated June 1, 2021, together with a revolving credit facility supplement (the “Revolving Credit Supplement”), a non-revolving credit facility supplement (the “Non-Revolving Credit Supplement,” and together with the Revolving Credit Supplement, the “Supplements”) and an agreement to convert to a fixed interest rate for a period of time as described in the table above (“Fixed Interest Rate Agreement”). The MLA governs the terms of the Supplements.
In March 2020, the Company entered into a revolving equity line of credit promissory note and loan agreement with the Lender for a $15,000,000 Revolving Equity Line of Credit (the “RELOC”) secured by a first lien on the Windfall Investors, LLC property. The RELOC featured a 3-year draw period followed by 20 years of fully amortized loan payments. On March 31, 2023, the draw period expired and the RELOC was closed as there was no balance outstanding.
The Supplements provide aggregate borrowing capacity of $115,000,000 comprised of $75,000,000 under the Revolving Credit Supplement, and $40,000,000 under the Non-Revolving Credit Supplement. As of October 31, 2023, the Company's outstanding borrowings under the Supplements were $40,000,000 and it had $75,000,000 available to borrow.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Long-Term Debt (continued)
In January 2023, the Company used the proceeds from the Northern Properties sale as described in Note 3 - Asset Sales and Disposals to reduce the Company's long-term debt.
The interest rate in effect under the Revolving Credit Supplement automatically adjusts on the first day of each month. The interest rate for any amount outstanding under the Revolving Credit Supplement was based on the one-month LIBOR plus or minus an applicable margin. As of January 1, 2023, the rate transitioned from LIBOR to the SOFR. The applicable margin ranges from 1.68% to 2.28% depending on the ratio of current assets, plus the remaining available commitment divided by current liabilities. On each one-year anniversary of July 1, the Company has the option to convert the interest rate in use under the Revolving Credit Supplement from the preceding SOFR-based calculation to a variable interest rate. The Company may prepay any amounts outstanding under the Revolving Credit Supplement without penalty.
The interest rate in effect under the Non-Revolving Credit Supplement is a fixed interest rate of 3.57% per year until July 1, 2025 (the “Fixed Rate Term”). Thereafter, the interest rate will convert to a variable interest rate established by the Lender corresponding to the applicable interest rate group. The Company may not prepay any amounts under the outstanding Non-Revolving Credit Supplement during the Fixed Rate Term. Thereafter, the Company may prepay any amounts outstanding under the Non-Revolving Credit Supplement, provided that a fee equal to 0.50% of the amount prepaid and any other cost or loss suffered by the Lender must be paid with any prepayment.
All indebtedness under the MLA, including any indebtedness under the Supplements, is secured by a first lien on Company-owned stock or participation certificates, Company funds maintained with the Lender, the Lender’s unallocated surplus, and certain of the Company’s agricultural properties and certain of the Company’s building fixtures and improvements and investments in mutual water companies associated with the pledged agricultural properties. The MLA includes customary default provisions. Should an event of default occur, the Lender, at its option, may declare all or any portion of the indebtedness under the MLA to be immediately due and payable without demand, notice of nonpayment, protest or prior recourse to collateral, and terminate or suspend the Company’s right to draw or request funds on any loan or line of credit.
The MLA subjects the Company 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 the Company’s business. The Company is also subject to a financial covenant that requires it to maintain compliance with a specific debt service coverage ratio on an annual basis. In September 2023, the Lender modified the covenant to defer measurement as of October 31, 2023 and resume a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2024.
The Company received annual cash patronage dividends from the Lender of $1,413,000, $1,582,000 and $1,170,000 in fiscal years 2023, 2022 and 2021, respectively.
Interest is capitalized on non-bearing orchards, real estate development projects and significant construction in progress. The Company capitalized interest of $864,000, $582,000 and $1,110,000 during fiscal years ended 2023, 2022 and 2021, respectively. Capitalized interest is included in property, plant and equipment, real estate development assets and equity in investments in the Company’s consolidated balance sheets.
Principal payments on the Company’s long-term debt are due as follows (in thousands):
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Other Long-Term Liabilities
Other long-term liabilities consist of the following as of October 31 (in thousands):
Minimum pension liability $ — $ 2,272
13. Leases
Lessor Arrangements
The Company enters into leasing transactions in which it rents certain of its assets and the Company is the lessor. These lease contracts are typically classified as operating leases with remaining terms ranging from one month to 19 years, with various renewal terms available. All of the residential rentals have month-to-month lease terms.
The following table presents the components of the Company’s operating lease portfolio included in property, plant and equipment, net as of October 31 (in thousands):
Buildings, equipment and building improvements 20,729 19,983
Less: accumulated depreciation (8,931) (7,912)
Property, plant and equipment, net under operating leases $ 32,541 $ 34,100
Depreciation expense for assets under operating leases was approximately $1,005,000 and $934,000 for fiscal years 2023 and 2022, respectively.
The Company's rental operations revenue consists of the following for the fiscal years ended October 31 (in thousands):
The future minimum lease payments to be received by the Company related to these operating lease agreements as of October 31, 2023 are as follows (in thousands):
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Leases (continued)
Lessee Arrangements
The Company enters into leasing transactions in which the Company is the lessee. These lease contracts are classified as either operating or finance leases. The Company’s lease contracts are generally for agricultural land and packinghouse facilities and equipment with remaining lease terms ranging from one to four years, with various term extensions available. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Lease costs are primarily included in agribusiness costs and expenses in the Company's consolidated statements of operations.
Lease costs consist of the following for the fiscal years ended October 31 (in thousands):
Finance lease costs:
Amortization of lease assets 145 120
Interest on lease liabilities 32 34
Variable lease costs — 242
Supplemental balance sheet information related to leases consists of the following as of October 31 (in thousands):
Assets
Operating lease ROU assets Other assets $ 3,484 $ 6,190
Finance lease assets Other assets 1,182 1,091
Liabilities
Current finance lease liabilities Accrued liabilities 319 268
Non-current operating lease liabilities Other long-term liabilities 1,714 4,347
Non-current finance lease liabilities Other long-term liabilities 602 715
Weighted-average remaining lease term (in years):
Operating leases 1.6 5.1
Finance leases 3.1 3.9
Weighted-average discount rate:
Operating leases 4.9 % 6.1 %
Finance leases 4.2 % 3.5 %
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Leases (continued)
Lessee Arrangements (continued)
Supplemental cash flow information related to leases consists of the following for the fiscal years ended October 31 (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases $ 1,931 $ 577
Operating cash outflows from finance leases $ 32 $ 35
Financing cash outflows from finance leases $ 297 $ 219
Leased assets obtained in exchange for new finance lease liabilities $ 235 $ 68
Write off of ROU asset and operating lease liability $ (1,206) $ —
Future minimum lease payments under non-cancellable leases are as follows (in thousands), which excludes $870,000 of operating lease payments for leases that have been signed but not commenced:
Operating Finance Total
Present value of lease liabilities $ 3,545 $ 921 $ 4,466
In addition to operating and finance lease commitments, the Company also has financing transactions which do not meet the definition of a lease, with minimum future payments of $224,000 in fiscal years 2024, 2025 and 2026 and $37,000 in fiscal year 2027.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)