Limoneira CO - Annual Report: 2021 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission file number: 001-34755
LIMONEIRA COMPANY
(Exact name of registrant as specified in its charter)
| Delaware | 77-0260692 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
1141 Cummings Road, Santa Paula, CA | 93060 | |||||||
| (Address of principal executive offices) | (Zip code) | |||||||
Registrant’s telephone number, including area code: (805) 525-5541
Securities registered pursuant to Section 12(b) of the Act:
| Name of Each Exchange | ||||||||
| Title of Each Class | Trading Symbol | On Which Registered | ||||||
| Common Stock, par value $0.01 per share | LMNR | The NASDAQ Stock Market LLC | ||||||
| (NASDAQ Global Select Market) | ||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer ☐ | Accelerated filer ☑ | Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
Based on the closing price as reported on the NASDAQ Global Market, the aggregate market value of the Registrant’s Common Stock held by non-affiliates on April 30, 2021 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $268.1 million. Shares of Common Stock held by each executive officer and director and by each stockholder affiliated with a director or an executive officer have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s Common Stock as of December 31, 2021 was 17,700,038.
Documents Incorporated by Reference
Portions of the Registrant’s Proxy Statement for the 2022 Annual Meeting of Stockholders, which we intend to hold on March 22, 2022, are incorporated by reference into Part III of this Annual Report on Form 10-K. The definitive Proxy Statement will be filed within 120 days after October 31, 2021.
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TABLE OF CONTENTS
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CAUTIONARY STATEMENT
This Annual Report on Form 10-K (this “Annual Report”) contains statements which, to the extent that they do not recite historical fact, constitute forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include the words "may," "will," “could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan" or other words or expressions of similar meaning. We have based these forward-looking statements on our current expectations about future events. The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans.
The potential risks and uncertainties that could cause our actual financial condition, results of operations and future performance to differ materially from those expressed or implied in this Annual Report include:
•negative impacts related to the COVID-19 pandemic and the effectiveness of our Company's responses to the pandemic;
•changes in laws, regulations, rules, quotas, tariffs and import laws;
•adverse weather conditions, natural disasters and other adverse natural conditions, including freezes, rains, fires and droughts, that affect the production, transportation, storage, import and export of fresh produce;
•market responses to industry volume pressures;
•increased pressure from disease, insects and other pests;
•disruption of water supplies or changes in water allocations;
•product and raw materials supplies and pricing;
•energy supply and pricing;
•changes in interest rates;
•availability of financing for development activities;
•general economic conditions for residential and commercial real estate development;
•political changes and economic crises;
•international conflict;
•acts of terrorism;
•labor disruptions, strikes, shortages or work stoppages;
•the impact of foreign exchange rate movements;
•ability to maintain compliance with covenants under our loan agreements;
•loss of important intellectual property rights; and
•other factors disclosed in our public filings with the Securities and Exchange Commission (the "SEC").
In addition, this Annual Report contains industry data related to our business and the markets in which we operate. This data includes projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results could differ from the projections or estimates, especially relating to the COVID-19 pandemic. We urge you to carefully review this Annual Report, particularly the section entitled “Risk Factors,” for a complete discussion of the risks of an investment in our common stock.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Many factors discussed in this Annual Report, some of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Annual Report as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
All references to “we,” “us,” “our,” “our Company,” “the Company,” or “Limoneira” in this Annual Report mean Limoneira Company, a Delaware corporation, and its consolidated subsidiaries.
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PART I
Item 1. Business
Limoneira Company, a Delaware corporation, is the successor to several businesses with operations in California since 1893. Our business and operations are described below. For detailed financial information with respect to our business and our operations, see our consolidated financial statements and the related notes to consolidated financial statements, which are included in Item 8 in this Annual Report. In addition, general information concerning our Company can be found on our website at www.limoneira.com. All of our filings with the SEC, including but not limited to, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments thereto, are available free of charge on our website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The contents of our website referred to above are not incorporated into this report. Further, any references to our website are intended to be interactive textual references only.
Overview
We are primarily an agribusiness company founded and based in Santa Paula, California, committed to responsibly using and managing our approximately 15,400 acres of land, water resources and other assets to maximize long-term stockholder value. Our current operations consist of fruit production, sales and marketing, rental operations, real estate and capital investment activities.
We are one of California’s oldest citrus growers. According to Sunkist Growers, Inc. (“Sunkist”), we are one of the largest growers of lemons in the United States and, according to the California Avocado Commission, one of the largest growers of avocados in the United States. In addition to growing lemons and avocados, we grow oranges and a variety of specialty citrus and other crops. We have agricultural plantings throughout Ventura, Tulare, San Luis Obispo and San Bernardino Counties in California, Yuma County in Arizona, La Serena, Chile and Jujuy, Argentina, which collectively consist of approximately 6,100 acres of lemons, 800 acres of avocados, 1,000 acres of oranges and 900 acres of specialty citrus and other crops. We also operate our own packinghouses in Santa Paula and Oxnard, California and Yuma, Arizona, where we process, pack and sell lemons that we grow, as well as lemons grown by others. We have a 47% interest in Rosales S.A. (“Rosales”), a citrus packing, marketing and sales business, a 90% interest in Fruticola Pan de Azucar S.A. (“PDA”), a lemon and orange orchard and 100% interest in Agricola San Pablo SpA. ("San Pablo"), a lemon and orange orchard, all of which are located near La Serena, Chile. We have a 51% interest in a joint venture, Trapani Fresh Consorcio de Cooperacion ("Trapani Fresh"), a lemon orchard in Argentina.
Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water from the San Joaquin Valley Basin and water from local water and irrigation districts in Tulare County, which is in California’s San Joaquin Valley. We also use ground water from the Cadiz Valley Basin in California’s San Bernardino County and surface water in Arizona from the Colorado River through the Yuma Mesa Irrigation and Drainage District (“YMIDD”). We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in Chile and our Trapani Fresh farming operations in Argentina.
For more than 100 years, we have been making strategic investments in California agriculture and real estate. We currently have an interest in three real estate development projects in California. These projects include multi-family housing and single-family homes of approximately 900 units in various stages of planning and development.
Fiscal Year 2021 Highlights and Recent Developments
We are equal partners in a joint venture with The Lewis Group of Companies (“Lewis”) for the residential development of our East Area I real estate development project. To consummate the transaction, we formed Limoneira Lewis Community Builders, LLC ("LLCB") as the development entity. The first phase of the project broke ground to commence mass grading in November 2017. LLCB has closed on lot sales representing 586 units from inception through October 31, 2021, including 232 units in fiscal year 2021. For further information see Note 7 – Real Estate Development of the notes to consolidated financial statements included in this Annual Report.
In December 2020, we received $5.0 million of federal income tax refunds related to the Coronavirus Aid Relief and Economic Security Act ("CARES Act") and received an additional $0.9 million of California state refunds in the third quarter of fiscal year 2021.
In June 2021, we entered into an agreement, effective March 1, 2021, to sell and license certain assets of Trapani Fresh to our 49% partner in the joint venture, FGF Trapani ("FGF"). These assets consist of packing supplies and certain intangible assets related to
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the packing, marketing, and selling business of Trapani Fresh. The total consideration to be received is approximately $3.9 million over an 8-year term in 16 equal installments. There was no material gain or loss recognized on the transaction. In August 2021, we entered into several additional agreements whereby the additional 25% interest in Finca Santa Clara ("Santa Clara") was transferred into the trust resulting in the trust now holding a 100% interest in Santa Clara. Trapani Fresh owns and operates the 1,200-acre Santa Clara ranch and now sells the lemons it grows to FGF, who packs, markets, and sells the fruit to its customers. As a result of this transaction, Trapani Fresh now recognizes lemon revenues at the market price, less packinghouse charges to harvest, pack and market the fruit.
In June 2021, we entered into a Master Loan Agreement (the “MLA”) with Farm Credit West, PCA (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 fixed interest rate ("Fixed Interest Rate Agreement"). The MLA governs the terms of the Supplements. The MLA amends and restates the previous Master Loan Agreement between our Company and the Lender, dated June 19, 2017 and extends the principal repayment to July 1, 2026.
In July 2021, we entered into a non-binding letter of intent to sell approximately 25 acres of our East Area II property in five staged purchases to an investment company for the purpose of constructing a medical campus consisting of medical office buildings and an acute care hospital. Completion of the transaction is subject to the execution of a purchase and sale agreement and resolution of certain contingencies.
In August 2021, we entered into an equipment finance agreement (the "FCW term loan") with the Lender in the amount of $2.5 million and used the proceeds to pay off the Wells Fargo term loan. The FCW term loan has a fixed interest rate of 3.19% and is payable in monthly installments through September 2026.
In September 2021, the Board of Directors of our Company approved a share repurchase program authorizing us to repurchase up to $10.0 million of our outstanding shares of common stock through September 2022. No shares have been repurchased under this program.
On December 14, 2021, we declared a cash dividend of $0.075 per common share payable on January 14, 2022, in the aggregate amount of $1.3 million to stockholders of record as of December 27, 2021.
COVID-19 Pandemic
The COVID-19 pandemic has had an adverse impact on the industries and markets in which we conduct business. In particular, the United States lemon market has seen a significant decline in volume, with lemon demand falling since widespread shelter in place orders were issued in mid-March 2020, resulting in a significant market oversupply. The export market for fresh product has also significantly declined due to the COVID-19 pandemic impacts. As of October 31, 2021, the demand within both markets is recovering but has not yet returned to pre-pandemic levels.
The decline in demand for our products beginning the second quarter of fiscal year 2020, which we believe was due to the COVID-19 pandemic, negatively impacted our sales and profitability for the last three quarters of fiscal year 2020 and all of fiscal year 2021. We also expect material adverse impacts on our sales and profitability in future periods. The duration of these trends and the magnitude of such impacts cannot be estimated at this time, as they are influenced by a number of factors, many of which are outside management’s control, including, but not limited, to those presented in Item 1A Risk Factors of this Annual Report. Notwithstanding the adverse impacts and subject to unforeseen changes that may arise as the COVID-19 pandemic continues, we currently expect improvement in fiscal year 2022 compared to fiscal year 2021.
Given the economic uncertainty as a result of the COVID-19 pandemic over the past two years, we have taken actions to improve our current liquidity position, including temporarily postponing capital expenditures, selling equity securities to increase cash, reducing operating costs, and substantially reducing discretionary spending.
Although we are considered an essential business, there is significant uncertainty around the breadth and duration of our business disruptions related to the COVID-19 pandemic, as well as its impact on the U.S. economy, the ongoing business operations of our customers and our results of operations and financial condition. Our management team is actively monitoring the impacts of the COVID-19 pandemic and may take further actions altering our business operations that we determine are in the best interests of our employees and customers or as required by federal, state, or local authorities, the full impact of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for fiscal year 2022 and beyond cannot be fully estimated at this point. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations.
Business Division Summary
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We have three business divisions: agribusiness, rental operations and real estate development. The agribusiness division is comprised of four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness, which includes oranges, specialty citrus and other crops. The agribusiness division includes our core operations of farming, harvesting, lemon packing and lemon sales operations. The rental operations division includes our residential and commercial rentals, leased land operations and organic recycling. The real estate development division includes our investments in real estate development projects. Financial information and discussion of our four reportable segments are contained in the notes to the accompanying consolidated financial statements of this Annual Report.
Agribusiness Summary
Farming
Lemons. We market and sell lemons directly to our food service, wholesale and retail customers throughout the United States, Canada, Asia, Australia, Europe and certain other international markets. We are one of the largest lemon growers in the United States with approximately 6,100 acres of lemons planted primarily in Ventura, Tulare and San Bernardino Counties in California and in Yuma County, Arizona. In California, the lemon growing area stretches from the Coachella Valley to Fresno and Monterey Counties, with the majority of the growing areas located in the coastal areas from Ventura County to Monterey County. Ventura County is California’s top lemon producing county. Approximately 27% of our lemons are grown in Ventura County, 22% are grown in Tulare County, 16% are grown in Yuma County, Arizona and 10% are grown in San Bernardino County, California. We also grow approximately 8% of our lemons near La Serena, Chile and 17% of our lemons in Argentina.
There are many varieties of lemons, with the Lisbon, Eureka and Genoa being the predominant varieties marketed on a worldwide basis. Approximately 88% of our lemon plantings are of the Lisbon, Eureka and Genoa varieties and approximately 12% are of other varieties such as sweet Meyer lemons, Proprietary Seedless lemons and Pink Variegated lemons. California-grown lemons are available throughout the year, with peak production periods occurring from January through August. The storage life of fresh lemons generally ranges from one to 18 weeks, depending upon the maturity of the fruit, the growing methods used and the handling conditions in the distribution chain.
Avocados. We are one of the largest avocado growers in the United States with approximately 800 acres of avocados planted throughout Ventura County. In California, the avocado growing area stretches from San Diego County to Monterey County, with the majority of the growing areas located approximately 100 miles north and south of Los Angeles County.
California-grown avocados have peak production periods occurring between February and July. Other avocado varieties have a more limited picking season and typically command a lower price. Because of superior eating quality, the Hass avocado has contributed greatly to the avocado’s growing popularity through its retail, restaurant and other food service uses. Approximately 95% of our avocado plantings are of the Hass variety. The storage life of fresh avocados generally ranges from one to four weeks, depending upon the maturity of the fruit, the growing methods used and the handling conditions in the distribution chain.
We provide a majority of our avocado production to Calavo, a packing and marketing company listed on the NASDAQ Global Select Market under the symbol CVGW. Calavo’s customers include many of the largest retail and food service companies in the United States and Canada. Calavo receives fruit from our orchards at its packinghouse located in Santa Paula, California. Calavo’s proximity to our agricultural operations enables us to keep transportation and handling costs to a minimum. Our avocados are packed by Calavo and sold and distributed under its own brands to its customers primarily in the United States and Canada.
Primarily due to differing soil conditions, the care of avocado trees is intensive. The need for more production per acre to compete with foreign sources of supply has required us to take an important lead in the practice of dense planting (typically four times the number of avocado trees per acre versus traditional avocado plantings) and mulching composition to help trees acclimate under conditions that more closely resemble those found in the tropics, a better climate for avocado growth.
Oranges, Specialty Citrus and Other Crops. We have approximately 1,000 acres of oranges planted primarily in Tulare County, California. In California, the growing area for oranges stretches from Imperial County to Yolo County. California-grown Navel oranges are available from October to June, with peak production periods occurring between January and April. Approximately 96% of our orange plantings are of the Navel variety and approximately 4% are of the Valencia variety. We estimate approximately 70% of our oranges are sold to retail customers and approximately 30% are sold to wholesale customers. We currently have approximately 900 acres of specialty citrus and other crops planted such as Moro blood oranges, Cara Cara oranges, Minneola tangelos, Star Ruby grapefruit, pummelos, pistachios and wine grapes.
We utilize third-party packinghouses to process and pack our oranges and specialty citrus. A portion of our oranges and specialty citrus is marketed and sold under the Sunkist brand by Sunkist and orders are processed by Sunkist-member packinghouses. As an
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agricultural cooperative, Sunkist coordinates the sales and marketing of the oranges and specialty citrus and orders are processed by Sunkist-member packinghouses for direct shipment to customers.
We currently market our other crops, such as pistachios and wine grapes, utilizing processors that are not members of agricultural cooperatives. Our pistachios are harvested and sold to a roaster, packager and marketer of nuts, and our wine grapes are sold to various wine producers.
Plantings
We have agricultural plantings on properties located in the United States, Chile and Argentina. The following is a description of our agriculture properties:
| Ranch Name | County / State or Country | Total Acres | Lemons | Avocados | Oranges | Specialty Crops | Other | |||||||||||||||||||||||||||||||||||||
| Limoneira/Olivelands | Ventura, CA | 1,700 | 600 | 500 | — | — | 600 | |||||||||||||||||||||||||||||||||||||
| La Campana | Ventura, CA | 300 | 100 | 200 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Teague McKevett | Ventura, CA | 500 | — | — | — | — | 500 | |||||||||||||||||||||||||||||||||||||
| Orchard Farm | Ventura, CA | 1,100 | 700 | — | — | — | 400 | |||||||||||||||||||||||||||||||||||||
| Rancho La Cuesta | Ventura, CA | 200 | 100 | — | — | — | 100 | |||||||||||||||||||||||||||||||||||||
| Limco Del Mar | Ventura, CA | 200 | 100 | 100 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Porterville Ranches | Tulare, CA | 1,200 | 300 | — | 300 | 200 | 400 | |||||||||||||||||||||||||||||||||||||
| Ducor Ranches | Tulare, CA | 1,000 | 400 | — | 300 | 300 | — | |||||||||||||||||||||||||||||||||||||
| Sheldon Ranches | Tulare, CA | 700 | 200 | — | 300 | 100 | 100 | |||||||||||||||||||||||||||||||||||||
| Lemons 400 | Tulare, CA | 800 | 400 | — | — | — | 400 | |||||||||||||||||||||||||||||||||||||
| Windfall Farms | San Luis Obispo, CA | 700 | — | — | — | 300 | 400 | |||||||||||||||||||||||||||||||||||||
| Cadiz | San Bernardino, CA | 800 | 600 | — | — | — | 200 | |||||||||||||||||||||||||||||||||||||
| Associated Citrus Packers | Yuma, AZ | 1,300 | 900 | — | — | — | 400 | |||||||||||||||||||||||||||||||||||||
| Pan de Azucar & San Pablo | La Serena, Chile | 3,500 | 500 | — | 100 | — | 2,900 | |||||||||||||||||||||||||||||||||||||
| Santa Clara | Jujuy, Argentina | 1,200 | 1,000 | — | — | — | 200 | |||||||||||||||||||||||||||||||||||||
| Other agribusiness land | Various Counties, CA | 200 | 200 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total | 15,400 | 6,100 | 800 | 1,000 | 900 | 6,600 | ||||||||||||||||||||||||||||||||||||||
| Percentage of Total | 100 | % | 40 | % | 5 | % | 6 | % | 6 | % | 43 | % | ||||||||||||||||||||||||||||||||
The Limoneira/Olivelands Ranch is the original site of our Company. Our headquarters, lemon packing operations and storage facilities are located on this property.
The Teague McKevett Ranch is the site of our real estate development project known as East Area I and described below under the “Real Estate Development Summary” heading.
The other agribusiness land in the table above includes corporate and lemon packing facilities, land leased to other agricultural businesses, rental units, roads, creeks, hillsides and other open land.
Our orchards can maintain production for many years. For financial reporting purposes, we depreciate our orchards from 20 to 40 years depending on the fruit variety with the majority of our orchards depreciated over 20 to 30 years. We regularly evaluate our orchards’ production and growing costs and based on these and other factors, we may decide to redevelop certain orchards. In addition, we may acquire agricultural property with existing productive orchards or without productive orchards, which would require new orchard plantings. The fruit varieties that we grow are typically non-producing for approximately the first four years after planting. Orchards may continue producing fruit longer than their depreciable lives. The following table presents the number of acres planted by fruit variety and approximate age of our orchards:
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| Age of Orchards | ||||||||||||||||||||||||||
| 0-4 Years | 5-25 Years | Over 25 Years | Total | |||||||||||||||||||||||
| Lemons | 1,000 | 4,800 | 300 | 6,100 | ||||||||||||||||||||||
| Avocados | — | 300 | 500 | 800 | ||||||||||||||||||||||
| Oranges | — | 500 | 500 | 1,000 | ||||||||||||||||||||||
| Specialty citrus and other | — | 800 | 100 | 900 | ||||||||||||||||||||||
| Total | 1,000 | 6,400 | 1,400 | 8,800 | ||||||||||||||||||||||
Lemon Packing and Sales
We are the oldest continuous lemon packing operation in North America. We pack and sell lemons grown by us as well as lemons grown by others, the operations of which are included in our financial statements under the lemon packing segment. Lemons delivered to our packinghouses in Santa Paula and Oxnard, California and Yuma, Arizona are sized, graded, cooled, ripened and packed for delivery to customers. Our ability to accurately estimate the size, grade and timing of the delivery of the annual lemon crop has a substantial impact on both our costs and the sales price we receive for the fruit.
A significant portion of the costs related to our lemon packing operation is fixed. Our strategy for growing the profitability of our lemon packing operations calls for optimizing the percentage of a crop that goes to the fresh market, or fresh utilization, and procuring a larger percentage of the California and Arizona lemon crop.
We invest considerable time and research into refining and improving our lemon packing through innovation and are continuously searching for new techniques to refine how premium lemons are delivered to our consumers. In fiscal year 2016, our updated lemon packing facility became operational, which doubled our lemon packing capacity and increased the efficiency and financial results of these operations. Additionally, we purchased a packing house and related land ("Oxnard Lemon") in fiscal year 2018.
Rental Operations Summary
Our rental operations include our residential and commercial rentals, leased land operations and organic recycling.
We own and maintain 256 residential housing units located in Ventura and Tulare Counties in California that we lease to employees, former employees and non-employees. We also own several commercial office buildings and as with our residential housing units, these properties generate reliable cash flows that we use to partially fund the operating costs of our business. As of October 31, 2021, we lease approximately 500 acres of our land to third-party agricultural tenants who grow a variety of row crops. Our leased land business provides us with a profitable method to diversify the use of our land. We also partner with one of our tenants and have an organic recycling facility on our land in Ventura County.
Real Estate Development Summary
We invest in real estate development projects and recognize that long-term strategies are required for successful real estate development activities. Our goal is to redeploy real estate earnings and cash flow into the expansion of our agribusiness and other income producing real estate. For real estate development projects and joint ventures, it is not unusual for the timing and amounts of revenues and costs, partner contributions and distributions, project loans, other financing assumptions and project cash flows to be impacted by government approvals, project revenue and cost estimates and assumptions, economic conditions, financing sources and product demand as well as other factors. Such factors could affect our results of operations, cash flows and liquidity.
For more than 100 years, we have been making strategic real estate investments in California agricultural and developable real estate. Our current real estate developments include developable land parcels, multi-family housing and single-family homes with approximately 900 units in various stages of planning and development. The following is a summary of each of the strategic agricultural and development real estate investment properties in which we own an interest:
East Area I - Santa Paula, California. East Area I consists of 523 acres that we historically used as agricultural land and is located in Santa Paula approximately ten miles from the City of Ventura and the Pacific Ocean. This property is also known as our Teague McKevett Ranch. East Area I is the location for our master planned community of commercial and residential properties designed to satisfy expected demand in a region that we believe will have few other developments in this coming decade. In 2008, after we completed a process of community planning and environmental review, the citizens of Santa Paula voted to approve the annexation
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of East Area I into Santa Paula. This vote was a requirement of the Save Open-Space and Agricultural Resources (“SOAR”) ordinance that mandates a public vote of the City of Santa Paula for land use conversion.
In November 2015, we entered into a joint venture with Lewis for the residential development of our East Area I real estate development project. To consummate the transaction, we formed LLCB as the development entity, contributed our East Area I property to the joint venture and sold a 50% interest in the joint venture to Lewis for $20.0 million. We expect to receive approximately $100.0 million from LLCB over the estimated 10 to 12-year life of the project, including $20.0 million received on the consummation of LLCB. LLCB's partners will share in capital contributions to fund project costs until loan proceeds and/or revenues are sufficient to fund the project. Since inception, each partner has made funding contributions of $21.4 million, including $2.8 million in fiscal year 2020. The first phase of the project broke ground to commence mass grading in November 2017. Project plans include approximately 1,500 residential units and site improvements substantially completed. Lot sales representing 232 and 144 residential units closed in fiscal years 2021 and 2020, respectively, and 586 residential units have closed from the project's inception to October 31, 2021.
East Area II - Santa Paula, California. Our design associates and we are in the process of formulating plans for East Area II, a parcel of approximately 30 acres adjacent to East Area I. East Area II is also a part of our Teague McKevett Ranch, which we believe is suited to commercial and/or industrial development along the south side of California Highway 126, a heavily traveled corridor that connects Highway 101 at Ventura on the west with Interstate 5 at Santa Clarita on the east. In July 2021, we entered into a non-binding letter of intent to sell approximately 25 acres of our East Area II property in five staged purchases to an investment company for the purpose of constructing a medical campus consisting of medical office buildings and an acute care hospital. Completion of the transaction is subject to the execution of a purchase and sale agreement and resolution of certain contingencies.
Santa Maria - Santa Barbara County, California. As of October 31, 2021, we were invested in one entitled development parcel, Sevilla, located in Santa Maria in Santa Barbara County, California. In fiscal year 2020, we entered into an agreement to sell our Sevilla property for $2.7 million, which is expected to close in the second quarter of fiscal year 2022.
Markets and Competitive Strengths
Agribusiness Operations
With agricultural operations dating back to 1893, we are one of California’s oldest citrus growers and one of the largest growers of lemons and avocados in the United States. Consequently, we have developed significant experience with a variety of crops, mainly lemons, avocados and oranges. The following is a brief list of what we believe are our significant competitive strengths with respect to our agribusiness operations:
•Our agricultural properties in Ventura County are located near the Pacific Ocean, which provides an ideal environment for growing lemons, avocados and row crops. Our agricultural properties in Tulare County, which is in the San Joaquin Valley in Central California, and in Yuma, Arizona, are also located in areas that are well-suited for growing citrus crops.
•Historically, a higher percentage of our crops goes to the fresh market, which is commonly referred to as fresh utilization, than that of other growers and packers with which we compete.
•We have contiguous and nearby land resources that permit us to efficiently use our agricultural land and resources.
•In all but one of our properties, we are not dependent on State or Federal water projects to support our agribusiness or real estate development operations.
•We own approximately 94% of our agricultural land and take a long view on our fruit production practices.
•A significant amount of our agribusiness property was acquired many years ago, which results in a low-cost basis and associated expenses.
•In our fresh lemons and lemon packing segments, our integrated business model with respect to growing, packing, marketing and selling lemons allows us to better serve our customers.
•Our lemon packing operations provide marketing opportunities with other citrus companies and their respective products.
•We have made investments in ground-based solar projects that provide us with tangible and intangible non-revenue generating benefits. The electricity generated by these investments provides us with a significant portion of the electricity required to operate our packinghouse and cold storage facilities located in Santa Paula, California and provides a significant portion of the electricity required to operate four deep-water well pumps at one of our ranches in Tulare County, California. Additionally, these investments support our sustainable agricultural practices, reduce our dependence
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on fossil-based electricity generation and lower our carbon footprint. Moreover, electricity that we generate and do not use is conveyed seamlessly back to the investor-owned utilities operating in these two markets. Finally, over time, we expect that our customers and the end consumers of our fruit will value the investments that we have made in renewable energy as a part of our farming and packing operations, which we believe may help us differentiate our products from similar commodities.
•We have made various other investments in water rights and mutual water companies. We own shares in the following mutual water companies: Farmers Irrigation Co., Canyon Irrigation Co., San Cayetano Mutual Water Co., Middle Road Mutual Water Co. and Pioneer Water Company, Inc. Additionally, we acquired water rights in the adjudicated Santa Paula Basin (aquifer), the YMIDD and in Chile.
Real Estate Development Operations
With respect to our real estate development operations, we believe our competitive advantages are as follows:
•We have entitlements to build approximately 1,500 residential units in our East Area I development.
•We have partnered with an experienced and financially strong land developer for our East Area I residential master plan development.
•Several of our agricultural and real estate investment properties are unique and carry longer-term development potential.
•Our East Area II property has approximately 30 acres of land commercially zoned, which is adjacent to our East Area I property.
Business Strategy
We are an agribusiness and real estate development company that generates annual cash flows to support investments in agricultural and real estate development activities. As our agricultural and real estate development investments are monetized, we intend to seek to expand our agribusiness into new regions and markets and invest in cash-producing residential, commercial and industrial rental assets.
The following describes the key elements of our business strategy.
Agribusiness
With respect to our agribusiness operations, key elements of our strategy are:
•Acquire Additional Lemon Producing Properties. To the extent attractive opportunities arise and our capital availability permits, we intend to consider the acquisition of additional lemon producing properties. In order to be considered, such properties would need to have certain characteristics to provide acceptable returns, such as an adequate source of water, a warm micro-climate and well-drained soils. We anticipate that the most attractive opportunities to acquire lemon producing properties will be in the San Joaquin Valley near our existing operations in Tulare County, California.
•Expand our Sources of Lemon Supply. Peak lemon production occurs at different times of the year depending on geographic region. In addition to our lemon production in California and Arizona and lemons we acquire from domestic third-party growers and suppliers, we have expanded our lemon supply sources to international markets such as Mexico, Chile and Argentina. Increases in lemons procured from third-party growers and suppliers and international sources improve our ability to provide our customers with fresh lemons throughout the year.
•Increase the Volume of our Lemon Packing Operations. We regularly monitor our costs for redundancies and opportunities for cost reductions. In this regard, cost per carton is a function of throughput. We continually seek to acquire additional lemons from third-party growers and suppliers to pack through our plants. Third-party growers and suppliers are only added if we determine their fruit is of good quality and can be cost effective for both the grower and us. Of most importance is the overall fresh utilization rate for our fruit, which is directly related to quality.
•Expand International Production and Marketing of Lemons. We estimate that we currently have approximately 10% of the fresh lemon market in the United States and a larger share of the United States lemon export market. We intend to explore opportunities to expand our international production and marketing of lemons. We have the ability to supply a wide range of customers and markets and, because we produce high quality lemons, we can export our lemons to international customers, which many of our competitors are unable to supply.
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•Construction of an Updated Lemon Packinghouse. Over the years, new machinery and equipment along with upgrades have been added to our original packinghouse and cold storage facilities. This, along with an aggressive and proactive maintenance program, has allowed us to operate an efficient, competitive lemon packing facility. A project to double the capacity and increase the efficiency of our lemon packing facilities became operational in fiscal year 2016. This project has increased fresh lemon processing capacity.
•Opportunistically Expand our Plantings of Avocados, Oranges, Specialty Citrus and Other Crops. Our plantings of avocados, oranges, specialty citrus and other crops have been profitable and have been pursued to diversify our product line. Agricultural land that we believe is not suitable for lemons is typically planted with oranges, specialty citrus or other crops. While we may expand our avocados, oranges, specialty citrus and other crops, we expect to do so on an opportunistic basis in locations that we believe offer a record of historical profitability.
Other Operations
With respect to our rental operations and real estate development activities, key elements of our strategy include the following:
•Secure Additional Rental and Housing Units. Our housing, commercial and land rental operations provide us with a consistent, dependable source of cash flow that helps to fund our overall activities. Additionally, we believe our housing rental operation allows us to offer a unique benefit to our employees.
•Opportunistically Lease Land to Third-Party Crop Farmers. We regularly monitor the profitability of our fruit-producing acreage to ensure acceptable per acre returns. When we determine that leasing the land to third-party row crop farmers would be more profitable than farming the land, we intend to seek third-party row crop tenants.
•Opportunistically Expand our Income-Producing Commercial and Industrial Rental Assets. We intend to redeploy our future financial gains to acquire additional income-producing real estate investments and agricultural properties.
•Selectively and Responsibly Develop our Agricultural Land. We recognize that long-term strategies are required for successful real estate development activities. We thus intend to maintain our position as a responsible agricultural landowner and major employer in Ventura County while focusing our real estate development activities on those agricultural land parcels that we believe offer the best opportunities to demonstrate our long-term vision for our community.
Customers
We market and sell our lemons directly to our food service, wholesale and retail customers in the United States, Canada, Asia, Australia, Europe and certain other international markets. We sold lemons to approximately 200 U.S. and international customers during fiscal year 2021. We sell a majority of our avocados to Calavo. Our oranges, specialty citrus and other crops are sold through Sunkist and other third-party packinghouses and our wine grapes are sold to wine producers.
Information about Geographic Areas
During fiscal years 2021, 2020 and 2019, we had an aggregate of approximately $3.0 million, $3.5 million and $3.2 million, respectively, of total sales in Chile by PDA and San Pablo. During fiscal years 2021, 2020 and 2019, we had an aggregate of approximately $3.6 million, $14.2 million and $14.7 million, respectively, of total sales in Argentina by Trapani Fresh. The majority of our avocados, oranges and specialty citrus and other crops are sold to packinghouses and processors located in the United States.
Competition
The agribusiness crop markets are intensely competitive, but no single producer has any significant market power over any market segments, as is consistent with the production of most agricultural commodities. Generally, there are a large number of global producers that sell through joint marketing organizations and cooperatives. Fruit is also sold to independent packers, both public and private, who then sell to their own customer base. Customers are typically large retail chains, food service companies, industrial manufacturers and distributors who sell and deliver to smaller customers in local markets throughout the world. In the purest sense, our largest competitors in our agribusiness segments are other citrus and avocado producers in California, Mexico, Chile, Argentina and Florida, a number of which are members of cooperatives such as Sunkist or have selling relationships with Calavo similar to that of Limoneira. Our lemons and oranges also compete with other fruits and vegetables for the share of consumer expenditures devoted to fresh fruit and vegetables: apples, pears, melons, pineapples and other tropical fruit. Avocado products compete in the
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supermarket with hummus products and other dips and salsas. For our specific crops, the size of the U.S. market is approximately $660 million for lemons, both fresh and juice, approximately $430 million for avocados, and approximately $1.7 billion for oranges, both fresh and juice. Competition in the various agribusiness markets is affected by reliability of supply, product quality, brand recognition and perception, price and the ability to satisfy changing customer preferences through innovative product offerings.
The sale and leasing of residential, commercial and industrial real estate is very competitive, with competition coming from numerous and varied sources throughout California. Our greatest direct competition for each of our current real estate development properties in Ventura and Santa Barbara Counties comes from other residential and commercial developments in nearby areas.
Resources and Raw Materials
In our fresh lemons and lemon packing segments, paper is considered a material raw product for our business because most of our products are packed in cardboard cartons for shipment. Paper is readily available and we have numerous suppliers for such material. In our agribusiness division, petroleum-based products such as herbicides and pesticides are considered raw materials and we have numerous suppliers for these products.
Intellectual Property
We have numerous trademarks and brands under which we market and sell our fruits, particularly lemons, domestically and internationally, many of which have been owned for decades. The material brands of Limoneira lemons include, but are not limited to, One World of Citrus®, Santa®, Paula®, Bridal Veil®, Fountain®, Golden Bowl® and Level®. These trademarks are owned by us and registered with the United States Patent and Trademark Office. We also acquired certain lemon brands with acquisitions, including Kiva®, Kachina®, Oxnard Lemon, Uno, Sunny, Trapani, Argentinian Beauty, Natural and Trapani Fresh.
Seasonal Nature of Business
As with any agribusiness enterprise, our agribusiness operations are predominantly seasonal in nature. The harvest and sale of our lemons, avocados, oranges and specialty citrus and other crops occurs in all quarters, but is generally more concentrated during our third quarter. Our lemons are generally grown and marketed throughout the year, our avocados are primarily sold from January through August, our oranges are primarily sold from January through June, our specialty citrus is primarily sold from November through April and our specialty crops, such as pistachios and wine grapes, are primarily sold in September and October.
Environmental and Regulatory Matters
Our agribusiness and real estate development divisions are subject to a broad range of evolving federal, state and local environmental laws and regulations. For example, the growing, packing, storing and distributing of our products is extensively regulated by various federal and state agencies. The California State Department of Food and Agriculture oversees our packing and processing of lemons and conducts tests for fruit quality and packaging standards. We are also subject to laws and regulations that govern the use of pesticides and other potentially hazardous substances and the treatment, handling, storage and disposal of materials and waste and the remediation of contaminated properties. Advertising of our products is subject to regulation by the Federal Trade Commission and our operations are subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act.
We seek to comply at all times with all such laws and regulations and to obtain any necessary permits and licenses, and we are not aware of any instances of material non-compliance. We believe our facilities and practices are sufficient to maintain compliance with applicable governmental laws, regulations, permits and licenses. Nevertheless, there is no guarantee that we will be able to comply with any future laws and regulations for necessary permits and licenses. Our failure to comply with applicable laws and regulations or obtain any necessary permits and licenses could subject us to civil remedies including fines, injunctions, recalls or seizures, as well as potential criminal sanctions. These remedies can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
For a discussion of the various risks we face from regulation and compliance matters, see Item 1A Risk Factors of this Annual Report.
Human Capital Resources
At October 31, 2021, we had 268 employees, of which 98 were salaried and 170 were hourly. None of our employees are subject to a collective bargaining agreement. We believe that our relations with our employees are good.
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We believe that an environment of diversity, inclusion, and belonging fosters innovation, strengthens our global workforce, and drives our ability to serve customers. Our global presence is strengthened by having a workforce that reflects the diversity of the customers we serve and by maintaining an environment in which such diversity contributes to our mission.
Limoneira is committed to protecting the human rights, safety and dignity of the people who contribute to the success of our business. We are committed to improving the lives of all our stakeholders by helping to provide access to our products and increasing the diversity of our workforce. We also seek to support the welfare of the people who produce, process and harvest the products we sell. We have established several new diversity, inclusion and belonging efforts and programs to better ensure that we are supporting our employees.
Limoneira’s overall culture emphasizes the health and safety of our employees and the customers we serve. Limoneira has an Illness and Injury Prevention Plan (IIPP), a Safety Guide and conforms to and follows regulations and guidelines set forth by OSHA in all facilities and operations. Where a particular jurisdiction's guidelines, such as Cal OHSA, are different from the OSHA standard, Limoneira adheres to the most extensive guideline. We have excellent results from our safety programs compared to similar companies within our industry. In response to the COVID-19 pandemic, we implemented, and continue to improve, appropriate safety measures in all our facilities and locations.
We strive to be a great place for our employees to work and live. We offer competitive pay and best-in-class benefits, including a 401k plan with matching contribution opportunities, comprehensive paid healthcare plans, wellness programs, and tuition reimbursement.
We own and maintain 256 residential housing units located in Ventura and Tulare Counties in California. We lease these housing units to employees, former employees and non-employees. Our residential units provide affordable housing to many of our employees, including our agribusiness employees. Employees live close to their work, which reduces traffic and commuting times. This unique employment benefit helps us maintain a dependable, long-term employee base. We partner with some local schools to provide transportation for residents.
Item 1A. Risk Factors
Risks Related to Our Agribusiness Operations
Adverse weather conditions, natural disasters, including earthquakes and wildfires, and other natural conditions, including the effects of climate change, could impose significant costs and losses on our business.
Fresh produce is vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common and may occur with higher frequency or be less predictable in the future due to the effects of climate change. Unfavorable growing conditions can reduce both crop size and crop quality. In extreme cases, entire harvests may be lost in some geographic areas.
All of our crops are subject to damage from frosts and freezes, and this has happened periodically in the recent past. In some cases, the fruit is damaged or ruined; in the case of extended periods of cold, the trees can also be damaged or killed.
Additionally, a significant portion of our agricultural plantings and our corporate headquarters are located in a region of California that is prone to natural disasters such as earthquakes and wildfires. For example, in December 2017, high winds and the related Southern California wildfires caused a brief power outage at our Santa Paula, California packinghouse and destroyed 14 of our 256 farm worker housing units. While our orchards did not suffer significant damage in the wildfire, the potential for significant damage to a substantial amount of our plantings from a natural disaster in the future continues to exist. Furthermore, if a natural disaster or other event occurs that prevents us from using all or a significant portion of our corporate headquarters, as a result of a power outage or otherwise, or that damages critical infrastructure, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial amount of time.
For the foregoing reasons, adverse weather conditions, natural disasters, including earthquakes and wildfires, or other natural conditions, including the effects of climate change, could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.
Our agricultural plantings are potentially subject to damage from disease and pests, which could impose losses on our business and the prevention of which could impose significant additional costs on us.
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Fresh produce is also vulnerable to crop disease and to pests, e.g., Mediterranean Fruit Fly and the Asian Citrus Psyllid (“ACP”), which may vary in severity and effect, depending on the stage of production at the time of infection or infestation, the type of treatment applied and climatic conditions.
One such pest is ACP, an aphid–like insect that is a serious pest to all citrus plants because it can transmit the disease, Huanglongbing (“HLB”), when it feeds on the plants’ leaves and trees. By itself, ACP causes only minor cosmetic damage to citrus trees. HLB, however, is considered one of the most devastating diseases of citrus in the world. Trees infected with HLB decline in health, produce inedible fruit and eventually die, usually in 3 to 5 years after becoming infected. Currently, there is no cure for the disease and infected trees must be removed and destroyed to prevent further spreading.
ACP is a federal action quarantine pest subject to interstate and international quarantine restrictions by the United States Department of Agriculture (“USDA”), including a prohibition on the movement of nursery stock out of quarantine areas and a requirement that all citrus fruit be cleaned of leaves and stems prior to movement out of the quarantine area. ACP and HLB exist domestically in California, Florida, Louisiana, Georgia, South Carolina and Texas and internationally in countries such as Mexico. Due to the discovery of ACP in our orchards, we have experienced costs related to the quarantine and treatment of ACP and incurred approximately $0.5 million of costs in fiscal year 2021 related to pest control efforts targeted against ACP. To date, HLB has been detected in Los Angeles, Orange, Riverside, San Bernardino and San Diego Counties in California, however there has been no HLB detected in our orchards. There can be no assurance that HLB will not be further detected in the future.
There are a number of registered insecticides known to be effective against ACP, however, certain markets and customer responses to the discovery of ACP and the related quarantine could result in a significant decline in revenue due to restrictions on where our lemons can be sold and lower demand for our lemons. Additional government regulations and other quarantine requirements or customer handling and inspection requirements could increase agribusiness costs to us. Our citrus orchards could be at risk if ACP starts to transmit the HLB disease to our trees. Agribusiness costs could also increase significantly as a result of HLB. For example, a study in Florida indicated the presence of HLB has increased citrus production costs by as much as 40%.
The costs to control these diseases and other infestations vary depending on the severity of the damage and the extent of the plantings affected. Moreover, there can be no assurance that available technologies to control such infestations will continue to be effective. These infestations can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
Our strategy of marketing and selling our lemons directly to our food service, wholesale and retail customers may not continue to be successful.
Directly obtaining and retaining customers, particularly chain stores and other large customers, is highly competitive, and the prices or other terms of our sales arrangements may not be sufficient to retain existing business, maintain current levels of profitability or obtain new business. Industry consolidation (horizontally and vertically) and other factors have increased the buying leverage of the major grocery retailers in our markets, which may put further downward pressure on our pricing and volume and could adversely affect our results of operations.
We depend on our relationship with Calavo and their ability to sell our avocados. Any disruption in this relationship could harm our sales.
We sell a majority of the avocados we grow to Calavo and depend on their willingness and ability to market and sell our avocados to consumers. Calavo sources its avocados from many growers and we cannot control who they will purchase from and how large their orders may be. Should there be any change in our current relationship structure, whereby they buy a majority of our avocado crop, we would need to find replacement buyers to purchase our remaining crop, which could take time and expense and may result in less favorable terms of sale. Any loss of Calavo as a customer on a whole may cause a material loss in our profits, as it may take time to fill any such void.
Our earnings are sensitive to fluctuations in market supply and prices and demand for our products.
Excess supplies often cause severe price competition in our industry. Growing conditions in various parts of the world, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product. The ongoing COVID-19 pandemic has also reduced the demand for our products resulting in excess supplies.
Fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. Some items, such as avocados, oranges and specialty citrus, must be sold more quickly, while other items, such as lemons, can be held in cold storage for
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longer periods of time. The selling price received for each type of produce depends on all of these factors, including the availability and quality of the produce item in the market and the availability and quality of competing types of produce.
In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, produce items which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.
Our earnings may be subject to seasonal variability.
Our earnings may be affected by seasonal factors, including:
•the seasonality of our supplies and consumer demand;
•the ability to process products during critical harvest periods; and
•the timing and effects of ripening and perishability.
Our lemons are generally grown and marketed throughout the year. Our Navel oranges are primarily sold from January through April and our Valencia oranges are primarily sold from June through September. Our avocados are primarily sold from January through August. Our specialty citrus is primarily sold from November through June and our pistachios and wine grapes are primarily sold in September and October.
Increases in commodity or raw product costs, such as fuel and paper, could adversely affect our operating results.
Many factors may affect the cost and supply of fresh produce, including external conditions, commodity market fluctuations, currency fluctuations, changes in governmental laws and regulations, agricultural programs, severe and prolonged weather conditions and natural disasters. Increased costs for purchased fruit have negatively impacted our operating results in the past, and there can be no assurance that they will not adversely affect our operating results in the future.
The price of various commodities can significantly affect our costs. The cost of petroleum-based products is volatile and there can be no assurance that there will not be further increases in such costs in the future. If the price of oil rises, the costs of our herbicides and pesticides can be significantly impacted.
The cost of paper is also significant to us because some of our products are packed in cardboard boxes for shipment. If the price of paper increases and we are not able to effectively pass these price increases along to our customers, then our operating income will decrease. Increased costs for paper have negatively impacted our operating income in the past, and there can be no assurance that these increased costs will not adversely affect our operating results in the future.
Increases in labor, personnel and benefits costs could adversely affect our operating results.
We primarily utilize labor contractors to grow, harvest and deliver our fruit to our lemon packinghouse or outside packing facilities. We utilize a combination of employees and labor contractors to process our lemons in our lemon packing facility. Our employees and contractors are in demand by other agribusinesses and other industries. Shortages of labor could delay our harvesting or lemon processing activities or could result in increases in labor costs.
Our labor contractors and we are subject to government mandated wage and benefit laws and regulations. For example, the State of California, where a substantial number of our labor contractors are located, passed regulations that increased minimum wage rates from $13.00 per hour to $14.00 per hour, effective January 1, 2021, and will increase to $15.00 per hour in 2022. The State of Arizona wage rates rise each year based on the annual cost of living and increased from $12.00 per hour to $12.15 per hour, effective January 1, 2021, and will increase to $12.80 per hour in 2022. In addition, current or future federal or state healthcare legislation and regulation, including the Affordable Care Act, may increase our medical costs or the medical costs of our labor contractors that could be passed on to us.
Changes in immigration laws could impact the ability of Limoneira to harvest its crops.
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We engage third parties to provide personnel for our harvesting operations. The availability and number of such workers is subject to decrease if there are changes in U.S. immigration laws. The states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and the U.S. Congress and the Department of Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations or enforcement programs. Immigration laws have recently been an area of considerable focus by the Department of Homeland Security, with enforcement operations taking place across the country, resulting in arrests and detentions of unauthorized workers. Termination of a significant number of personnel who are found to be unauthorized workers or the scarcity of available personnel to harvest our agricultural products could cause harvesting costs to increase or could lead to the loss of product that is not timely harvested, which could have a material adverse effect to our citrus grove operations, financial position, results of operations and cash flows.
The lack of sufficient water would severely impact our ability to produce crops or develop real estate.
The average rainfall in Ventura, Tulare, San Luis Obispo and San Bernardino Counties in California is substantially below amounts required to grow crops and therefore we are dependent on our rights to pump water from underground aquifers. Extended periods of drought in California may put additional pressure on the use and availability of water for agricultural uses, and in some cases, governmental authorities have diverted water to other uses. As California has grown in population, there are increasing and multiple pressures on the use and distribution of water, which many view as a finite resource. Lack of available potable water can also limit real estate development.
Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations is sourced from the existing water resources associated with our land, which includes rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore and Paso Robles Basins (aquifers). We use ground water and water from local water districts in Tulare County and ground water in San Bernardino County. Following our acquisition of Associated, we began using federal project water in Arizona from the Colorado River through the YMIDD. We also have acquired water rights in Chile related to our acquisitions of PDA and San Pablo.
California has experienced below average precipitation in the 2019 - 2020 and 2020 - 2021 rainfall season and above average precipitation in the first three months of the current rainfall season as of December 31, 2021. According to the U.S. Drought Monitor, California is experiencing severe drought conditions as of December 31, 2021. In October 2021, the California Governor declared a drought state of emergency statewide. Federal officials who oversee the Central Valley Project, California’s largest water delivery system, allocated 5% of the contracted amount of water to San Joaquin Valley farmers in 2021 compared to 100% in 2017 through 2020. We are assessing the impact these reductions may have on our California orchards.
In August 2021, the U.S. Bureau of Reclamation declared a Level 1 Shortage Condition at Lake Mead in the Lower Colorado River Basin for the first time ever, requiring shortage reductions and water savings contributions for states in the southwest. Beginning January 1, 2022, Arizona will see water releases from Lake Mead reduced by approximately 18% of the state’s annual apportionment. We are assessing the impact these reductions may have on our Arizona orchards.
For fiscal year 2021, irrigation costs for our agricultural operations were $0.7 million higher than fiscal year 2020. Costs may increase as we pump more water than our historical averages and federal, state and local water delivery infrastructure costs may increase to access these limited water supplies. We have an ongoing plan for irrigation improvements continuing in fiscal year 2022 that includes drilling new wells and upgrading existing wells and irrigation systems.
We believe we have access to adequate supplies of water for our agricultural operations as well as our real estate development and rental operations and currently do not anticipate that future drought conditions will have a material impact on our operating results. However, if future drought conditions are worse than prior drought conditions or if regulatory responses to such conditions limit our access to water, our business could be negatively impacted by these conditions and responses in terms of access to water and/or cost of water.
The use of herbicides, pesticides and other potentially hazardous substances in our operations may lead to environmental damage and result in increased costs to us.
We use herbicides, pesticides and other potentially hazardous substances in the operation of our business. We may have to pay for the costs or damages associated with the improper application, accidental release or use or misuse of such substances. Our insurance may not be adequate to cover such costs or damages or may not continue to be available at a price or under terms that are satisfactory to us. In such cases, payment of such costs or damages could have a material adverse effect on our business, results of operations and financial condition.
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Environmental and other regulation of our business, including potential climate change regulation, could adversely impact us by increasing our production cost or restricting our ability to import certain products into the United States.
Our business depends on the use of fertilizers, pesticides and other agricultural products. The use and disposal of these products in some jurisdictions are subject to regulation by various agencies. A decision by a regulatory agency to significantly restrict the use of such products that have traditionally been used in the cultivation of one of our principal products could have an adverse impact on us. Under the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Food, Drug and Cosmetic Act and the Food Quality Protection Act of 1996, the EPA is undertaking a series of regulatory actions relating to the evaluation and use of pesticides in the food industry. Similarly, in the EU, regulation (EC) No. 1107/2009 fundamentally changed the pesticide approval process to hazard criteria based on the intrinsic properties of the substance. These actions and future actions regarding the availability and use of pesticides could have an adverse effect on us. In addition, if a regulatory agency were to determine that we are not in compliance with a regulation in that agency’s jurisdiction, this could result in substantial penalties and a ban on the sale of part or all of our products in that jurisdiction.
A global economic downturn may have an adverse impact on participants in our industry, which cannot be fully predicted.
The full impact of a global economic downturn on customers, vendors and other business partners, such as that seen with the COVID-19 pandemic, cannot be anticipated. For example, major customers or vendors may have financial challenges unrelated to us that could result in a decrease in their business with us or, in extreme cases, cause them to file for bankruptcy protection. Similarly, parties to contracts may be forced to breach their obligations under those contracts. Although we exercise prudent oversight of the credit ratings and financial strength of our major business partners and seek to diversify our risk to any single business partner, there can be no assurance that there will not be a bank, insurance company, supplier, customer or other financial partner that is unable to meet its contractual commitments to us. Similarly, stresses and pressures in the industry may result in impacts on our business partners and competitors, which could have wide-ranging impacts on the future of the industry.
We are subject to the risk of product contamination and product liability claims.
The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability insurance however, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage.
We are subject to transportation risks.
An extended interruption in our ability to ship our products could have a material adverse effect on our business, financial condition and results of operations. Similarly, any extended disruption in the distribution of our products or supply chain issues could have a material adverse effect on our business, financial condition and results of operations. While we believe we are adequately insured and would attempt to transport our products by alternative means if we were to experience an interruption due to strike, natural disasters or otherwise, we cannot be sure that we would be able to do so or be successful in doing so in a timely and cost-effective manner.
Events or rumors relating to LIMONEIRA or our other trademarks and related brands could significantly impact our business.
Consumer and institutional recognition of the LIMONEIRA, One World of Citrus®, Santa®, Paula®, Bridal Veil®, Fountain®, Golden Bowl®, Level®, Kiva®, Kachina®, Oxnard Lemon, Uno, Sunny, Trapani, Argentinian Beauty, Natural and Trapani Fresh trademarks and related brands and the association of these brands with high quality and safe food products are an integral part of our business. The occurrence of any events or rumors that cause consumers and/or institutions to no longer associate these brands with high quality and safe food products may materially adversely affect the value of our brand names and demand for our products.
Government regulation could increase our costs of production and increase legal and regulatory expenses.
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Growing, packaging, storing and distributing food products are activities subject to extensive federal, state and local regulation, as well as foreign regulation. The U.S. Food and Drug Administration (the “FDA”), the USDA and various state and local public health and agricultural agencies regulate these aspects of our operations. Our business is subject to the FDA Food Safety Modernization Act to ensure food safety. This Act provides direct recall authority to the FDA and includes a number of other provisions designed to enhance food safety, including increased inspections by the FDA of food facilities. The Federal Perishable Agricultural Commodities Act, which specifies standards for the sale, shipment, inspection and rejection of agricultural products, governs our relationships with our fresh food suppliers with respect to the grading and commercial acceptance of product shipments. Import and export controls and similar laws and regulations, in both the United States and elsewhere affect our business. Issues such as health and safety, which may slow or otherwise restrict imports and exports, could adversely affect our business. In addition, the modification of existing laws or regulations or the introduction of new laws or regulations could require us to make material expenditures or otherwise adversely affect the way that we have historically operated our business.
Our strategy to expand international production and marketing may not be successful and may subject us to risks associated with doing business in corrupt environments.
While we intend to expand our lemon supply sources to international markets and explore opportunities to expand our international production and marketing of lemons, we may not be successful in implementing this strategy. Additionally, in many countries outside of the United States, particularly in those with developing economies, it may be common for others to engage in business practices prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act or similar local anti-bribery laws. These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially and adversely affect our financial condition and results of operations.
We depend on our infrastructure to have sufficient capacity to handle our annual lemon production needs.
We have an infrastructure that has sufficient capacity for our lemon production needs, but if we lose machinery or facilities due to natural disasters or mechanical failure, we may not be able to operate at a sufficient capacity to meet our lemon production needs. This could have a material adverse effect on our business, which could impact our results of operations and our financial condition.
Risks Related to Our Indebtedness
We may be unable to generate sufficient cash flow to service our debt obligations.
To service our debt, we require a significant amount of cash. Our ability to generate cash, make scheduled payments or refinance our obligations depends on our successful financial and operating performance. Our financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions and various financial, business and other factors, many of which are beyond our control. These factors include among others:
•economic and competitive conditions;
•changes in laws and regulations;
•operating difficulties, increased operating costs or pricing pressures we may experience; and
•delays in implementing any strategic projects.
If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. If we are required to take any actions referred to above, it could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that we would be able to take any of these actions on terms acceptable to us, or at all, or that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt agreements.
Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely restrict our financial and operating flexibility and subject us to other risks.
Our revolving and non-revolving credit and term loan facilities contain various restrictive covenants that limit our ability to take certain actions. In particular, these agreements limit our ability to, among other things:
•incur additional indebtedness;
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•make certain investments or acquisitions;
•create certain liens on our assets;
•engage in certain types of transactions with affiliates;
•merge, consolidate or transfer substantially all our assets; and
•transfer and sell assets.
Our revolving and non-revolving credit facility with the Farm Credit West Credit Facility contain a financial covenant that requires us to maintain compliance with a specified debt service coverage ratio on an annual basis. In December 2021, the Lender modified the covenant to defer measurement at October 31, 2021 and revert to a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2022. Our failure to comply with this covenant in the future may result in the declaration of an event of default under our Farm Credit West Credit Facility.
Any or all of these covenants could have a material adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations. Any future debt could also contain financial and other covenants more restrictive than those imposed under our line of credit and term loan facilities. A breach of a covenant or other provision in any credit facility governing our current and future indebtedness could result in a default under that facility and, due to cross-default and cross-acceleration provisions, could result in a default under our other credit facilities. Upon the occurrence of an event of default under any of our credit facilities, the applicable lender(s) could elect to declare all amounts outstanding to be immediately due and payable and, with respect to our revolving credit facility, terminate all commitments to extend further credit. If we were unable to repay those amounts, our lenders could proceed against the collateral granted to them to secure the indebtedness. If the lenders under our current or future indebtedness were to accelerate the payment of the indebtedness, we cannot assure you that our assets or cash flow would be sufficient to repay in full our outstanding indebtedness.
Despite our relatively high current indebtedness levels and the restrictive covenants set forth in agreements governing our indebtedness, we may still incur significant additional indebtedness, including secured and guaranteed indebtedness. Incurring more indebtedness could increase the risks associated with our substantial indebtedness.
Subject to the restrictions in our credit facilities, we may incur significant additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could increase.
In January 2018, LLCB entered into a $45.0 million unsecured Line of Credit Loan Agreement and Promissory Note (the “Loan”) with Bank of America, N.A. to fund early development activities. The Loan, as modified and extended, matures February 22, 2023 and has a one-year extension option through February 22, 2024 subject to terms and conditions as defined in the agreement, with the maximum borrowing amount reduced to $35.0 million during the extension period. The Loan contains certain customary default provisions and LLCB may prepay any amounts outstanding under the Loan without penalty. The obligations under the Loan are guaranteed by certain principals from Lewis and us. Defaults by LLCB could increase our indebtedness.
Some of our debt is based on variable rates of interest, which could result in higher interest expenses in the event of an increase in the interest rates.
Our Farm Credit West Credit Facility currently bears interest at a variable rate, which will generally change as interest rates change. We bear the risk that the rates we are charged by our lender will increase faster than the earnings and cash flow of our business, which could reduce profitability, adversely affect our ability to service our debt, cause us to breach covenants contained in our Farm Credit West Credit Facility, which could materially adversely affect our business, financial condition and results of operations. Several of our Company’s debt agreements use LIBOR as a reference rate. The expected discontinuation of LIBOR after 2021 could have a significant impact on us if we cannot replace LIBOR with alternative reference rates at or below the current LIBOR rate.
Global capital and credit market issues affect our liquidity, increase our borrowing costs and may affect the operations of our suppliers and customers.
The global capital and credit markets have experienced increased volatility and disruption over the past several years, making it more difficult for companies to access those markets. We depend in part on stable, liquid and well-functioning capital and credit markets to fund our operations. Although we believe that our operating cash flows and existing credit facilities will permit us to meet our financing needs for the foreseeable future, there can be no assurance that continued or increased volatility and disruption in the capital and credit markets will not impair our liquidity or increase our costs of borrowing. Our business could also be negatively impacted if our suppliers or customers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy.
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Risks Related to Our Real Estate Development Operations
We are involved in a cyclical industry and are affected by changes in general and local economic conditions.
The real estate development industry is cyclical and is significantly affected by changes in general and local economic conditions, including:
•employment levels;
•availability of financing;
•interest rates;
•consumer confidence;
•demand for the developed product, whether residential or industrial;
•supply of similar product, whether residential or industrial; and
•local, state and federal government regulation, including eminent domain laws, which may result in taking for less compensation than the owner believes the property is worth.
The process of project development and the commitment of financial and other resources occur long before a real estate project comes to market. A real estate project could come to market at a time when the real estate market is depressed. It is also possible in a rural area like ours that no market for the project will develop as projected.
A recession in the global economy, or a downturn in national or regional economic conditions, could adversely impact our real estate development business.
Future economic instability or tightening in the credit markets could lead to another housing market collapse, which could adversely affect our real estate development operations. Our future real estate sales, revenues, financial condition and results of operations could suffer as a result. Our business is especially sensitive to economic conditions in California and Arizona, where our properties are located.
Higher interest rates and lack of available financing can have significant impacts on the real estate industry.
Higher interest rates generally impact the real estate industry by making it harder for buyers to qualify for financing, which can lead to a decrease in the demand for residential, commercial or industrial sites. Any decrease in demand will negatively impact our proposed developments. Since the most recent recession, the Board of Governors of the Federal Reserve System has taken actions that have resulted in low interest rates prevailing in the marketplace for a historically long period of time. Market interest rates may increase in the future and the increase may materially and negatively affect us. Lack of available credit to finance real estate purchases can also negatively impact demand. Any downturn in the economy or consumer confidence can also be expected to result in reduced housing demand and slower industrial development, which would negatively impact the demand for land we are developing.
We are subject to various land use regulations and require governmental approvals for our developments that could be denied.
In planning and developing our land, we are subject to various local, state, and federal statutes, ordinances, rules and regulations concerning zoning, infrastructure design, subdivision of land, and construction. All of our new developments require amending existing general plan and zoning designations, so it is possible that our entitlement applications could be denied. In addition, the zoning that ultimately is approved could include density provisions that would limit the number of homes and other structures that could be built within the boundaries of a particular area, which could adversely impact the financial returns from a given project. In addition, in the past, many states, cities and counties (including Ventura County) have approved various “slow growth” or “urban limit line” measures.
If unforeseen regulatory challenges with East Areas I and II occur, we may not be able to develop these projects as planned and the approximately $83.0 million investment we have in the projects could be impaired in the future.
Third-party litigation could increase the time and cost of our real estate development efforts.
The land use approval processes we must follow to ultimately develop our projects have become increasingly complex. Moreover, the statutes, regulations and ordinances governing the approval processes provide third parties the opportunity to challenge the proposed plans and approvals. As a result, the prospect of third-party challenges to planned real estate developments provides
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additional uncertainties in real estate development planning and entitlements. Third-party challenges in the form of litigation would, by their nature, adversely affect the length of time and the cost required to obtain the necessary approvals. In addition, adverse decisions arising from any litigation would increase the costs and length of time to obtain ultimate approval of a project and could adversely affect the design, scope, plans and profitability of a project.
We are subject to environmental regulations and opposition from environmental groups that could cause delays and increase the costs of our real estate development efforts or preclude such development entirely.
Environmental laws that apply to a given site can vary greatly according to the site’s location and condition, the present and former uses of the site, and the presence or absence of sensitive elements like wetlands and endangered species. Environmental laws and conditions may (i) result in delays, (ii) cause us to incur additional costs for compliance, where a significant amount of our developable land is located, mitigation and processing land use applications, or (iii) preclude development in specific areas. In addition, in California, third parties have the ability to file litigation challenging the approval of a project, which they usually do by alleging inadequate disclosure and mitigation of the environmental impacts of the project. While we have worked with representatives of various environmental interests and wildlife agencies to minimize and mitigate the impacts of our planned projects, certain groups opposed to development may oppose our projects vigorously, so litigation challenging their approval could occur. Recent concerns over the impact of development on water availability and global warming increases the breadth of potential obstacles that our developments face.
Our developable land is concentrated entirely in California and Arizona.
All of our developable land is located in California and Arizona, and our business is especially sensitive to the economic conditions within California. Any adverse change in the economic climate of California, Arizona, or our regions of those states, and any adverse change in the political or regulatory climate of California or Arizona, or the counties where our land is located in such states, could adversely affect our real estate development activities. Ultimately, our ability to sell or lease lots may decline as a result of weak economic conditions or restrictive regulations.
If the real estate industry weakens or instability of the mortgage industry and commercial real estate financing exists, it could have an adverse effect on our real estate activities.
If the residential real estate market weakens or instability of the mortgage industry and commercial real estate financing exists, our residential real estate business could be adversely affected. An excess supply of homes available due to foreclosures or the expectation of deflation in house prices could also have a negative impact on our ability to sell our inventory when it becomes available.
We rely on contractual arrangements with third party advisors to assist us in carrying out our real estate development projects and are subject to risks associated with such arrangements.
We utilize third party contractor and consultant arrangements to assist us in operating our real estate development segment. These contractual arrangements may not be as effective in providing direct control over this business segment. For example, our third-party advisors could fail to take actions required for our real estate development businesses despite their contractual obligation to do so. If the third-party advisors fail to perform under their agreements with us, we may have to rely on legal remedies under the law, which may not be effective. In addition, we cannot assure you that our third-party advisors would always act in our best interests.
If we are unable to complete land development projects within forecasted time and budget expectations, if at all, our financial results may be negatively affected.
We intend to develop land and real estate properties as suitable opportunities arise, taking into consideration the general economic climate. New real estate development projects have a number of risks, including the following:
•Construction delays or cost overruns that may increase project costs;
•Receipt of zoning, occupancy and other required governmental permits and authorizations;
•Development costs incurred for projects that are not pursued to completion;
•Earthquakes, hurricanes, floods, fires or other natural disasters that could adversely affect a project;
•Defects in design or construction that may result in additional costs to remedy or require all or a portion of a property to be closed during the period required to rectify the situation;
•Our ability to raise capital;
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•The impact of governmental assessments such as park fees or affordable housing requirements;
•Governmental restrictions on the nature and size of a project or timing of completion; and
•The potential lack of adequate building/construction capacity for large development projects.
If any development project is not completed on time or within budget, our financial results may be negatively affected.
If we are unable to obtain required land use entitlements at reasonable costs, or at all, our operating results would be adversely affected.
The financial performance of our real estate development activities is closely related to our success in obtaining land use entitlements for proposed development projects. Obtaining all of the necessary entitlements to develop a parcel of land is often difficult, costly and may take several years, or more, to complete. In some situations, we may be unable to obtain the necessary entitlements to proceed with a real estate development or may be required to alter our plans for the development. Delays or failures to obtain these entitlements may have a material adverse effect on our financial results.
We could experience a reduction in revenues or reduced cash flows if we are unable to obtain reasonably priced financing to support our real estate development projects and land development activities.
The real estate development industry is capital intensive, and development requires significant up-front expenditures to develop land and begin real estate construction. Accordingly, we have and may continue to incur substantial indebtedness to finance our real estate development and land development activities. Although we believe that internally generated funds and current and available borrowing capacity will be sufficient to fund our capital and other expenditures, including additional land acquisition, development and construction activities, and the amounts available from such sources may not be adequate to meet our needs. If such sources were insufficient, we would seek additional capital in the form of debt from a variety of potential sources, including bank financing. The availability of borrowed funds to be used for additional land acquisition, development and construction may be greatly reduced, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with new loans. The failure to obtain sufficient capital to fund our planned expenditures could have a material adverse effect on our business and operations and our results of operations in future periods.
We may encounter risks associated with the real estate joint venture we entered into in November 2015 with the Lewis Group of Companies including:
•the joint venture may not perform financially or operationally as expected;
•land values, project costs, sales absorption or other assumptions included in the development plans may cause the joint venture’s operating results to be less than expected;
•the joint venture may not be able to obtain project loans on acceptable terms;
•the joint venture partners may not be able to provide capital to the joint venture in the event external financing or project cash flows are not sufficient to finance the joint venture’s operations;
•the joint venture partners may not manage the project properly; and
•disagreements could occur between the joint venture partners that could affect the operating results of the joint venture or could result in a sale of a partner’s interest or the joint venture at undesirable values.
We may encounter other risks that could impact our ability to develop our land.
We may also encounter other difficulties in developing our land, including:
•natural risks, such as geological and soil problems, earthquakes, fire, heavy rains and flooding and heavy winds;
•shortages of qualified trades people;
•reliance on local contractors, who may be inadequately capitalized;
•shortages of materials;
•increases in the cost of certain materials; and
•environmental remediation costs.
General Risks and Risks Related to Our Common Stock
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Our business is highly competitive and we cannot assure you that we will maintain our current market share.
Many companies compete in our different businesses. However, only a few well-established companies operate on an international, national and regional basis with one or several product lines. We face strong competition from these and other companies in all our product lines.
Important factors with respect to our competitors include the following:
•Some of our competitors may have greater operating flexibility and, in certain cases, this may permit them to respond better or more quickly to changes in the industry or to introduce new products and packaging more quickly and with greater marketing support.
•We cannot predict the pricing or promotional actions of our competitors or whether those actions will have a negative effect on us.
There can be no assurance that we will continue to compete effectively with our present and future competitors, and our ability to compete could be materially adversely affected by our debt levels and debt service requirements.
Currency exchange fluctuation may impact the results of our operations.
We distribute our products both nationally and internationally. Our international sales are primarily transacted in U.S. dollars. Our results of operations are affected by fluctuations in currency exchange rates in both sourcing and selling locations. In the past, periods of a strong U.S. dollar relative to other currencies have led international customers, particularly in Asia, to find alternative sources of fruit.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
We currently depend heavily on the services of our key management personnel. The loss of any key personnel could materially and adversely affect our results of operations, financial condition, or our ability to pursue land development. Our success will also depend in part on our ability to attract and retain additional qualified management personnel.
Inflation can have a significant adverse effect on our operations.
Inflation can have a major impact on our farming operations. The farming operations are most affected by escalating costs and unpredictable revenues (due to an oversupply of certain crops) and very high irrigation water costs. High fixed water costs related to our farm lands will continue to adversely affect earnings. Prices received for many of our products are dependent upon prevailing market conditions and commodity prices. Therefore, it is difficult for us to accurately predict revenue and we cannot pass on cost increases caused by general inflation, except to the extent reflected in market conditions and commodity prices.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to customers, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
Computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, packing, distribution or other critical functions.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales,
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lower margins or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.
The acquisition of other businesses could pose risks to our operating income.
We intend to continue to consider acquisition prospects that we think complement our business. While we are not currently a party to any agreement with respect to any acquisitions, we may acquire other businesses in the future. Future acquisitions by us could result in accounting charges, potentially dilutive issuances of equity securities, and increased debt and contingent liabilities, any of which could have a material adverse effect on our business and the market price of our common stock. Acquisitions entail numerous risks, including the integration of the acquired operations, diversion of management’s attention to other business concerns, risks of entering markets in which we have limited prior experience, and potential loss of key employees of acquired organizations. We may be unable to successfully integrate businesses or the personnel of any business that might be acquired in the future, and our failure to do so could have a material adverse effect on our business and on the market price of our common stock.
The value of our common stock could be volatile.
Investing in our common stock involves a high degree of risk. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. The risks described here are not the only ones we will face. If any of these risks or other risks actually occurs, our business, financial condition, results of operations or future prospects could be materially and adversely affected. In such event, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment.
The overall market and the price of our common stock may fluctuate greatly and we cannot assure you that you will be able to resell shares at or above market price. The trading price of our common stock may be significantly affected by various factors, including:
•quarterly fluctuations in our operating results;
•changes in investors’ and analysts’ perception of the business risks and conditions of our business;
•our ability to meet the earnings estimates and other performance expectations of financial analysts or investors;
•unfavorable commentary or downgrades of our stock by equity research analysts;
•fluctuations in the stock prices of our peer companies or in stock markets in general; and
•general economic or political conditions.
Concentrated ownership of our common stock creates a risk of sudden change in our share price.
As of October 31, 2021, directors and members of our executive management team beneficially owned or controlled approximately 6.6% of our common stock. Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large stockholders of a significant portion of that stockholder’s holdings could have a material adverse effect on the market price of our common stock. In addition, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly.
Our charter documents contain provisions that may delay, defer or prevent a change of control.
Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders. These provisions include the following:
•division of our board of directors into three classes, with each class serving a staggered three-year term;
•removal of directors by stockholders by a supermajority of two-thirds of the outstanding shares;
•ability of the board of directors to authorize the issuance of preferred stock in series without stockholder approval; and
•prohibitions on our stockholders that prevent them from acting by written consent and limitations on calling special meetings.
We incur increased costs as a result of being a publicly traded company.
As a Company with publicly traded securities, we have incurred, and will continue to incur, significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules promulgated by the SEC and NASDAQ, require us to adopt
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corporate governance practices applicable to U.S. public companies. These rules and regulations may increase our legal and financial compliance costs, which could adversely affect the trading price of our common stock.
In our Annual Report for fiscal year ended October 31, 2020 we identified a material weakness in our internal control over financial reporting. If we fail to properly remediate any weaknesses or fail to maintain effective internal controls, there could be an adverse impact on our operations or the market price of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on Form 10-K our assessment of the effectiveness of our internal control over financial reporting. As previously disclosed in our Annual Report for fiscal year ended October 31, 2020, we identified a material weakness in our internal control over financial reporting related to an acquired foreign subsidiary in the first year the subsidiary was included in management’s evaluation of the effectiveness of our internal control over financial reporting. In fiscal year 2021, we remediated the material weakness and the remediation measures have strengthened the design and operating effectiveness of our internal control over financial reporting.
We may in the future identify further material weaknesses in our internal control over financial reporting that we have not discovered to date. If we cannot adequately maintain the effectiveness of our internal control over financial reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results, cause investors to lose confidence in the reliability of our financial statements and result in a decrease in the value of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Real Estate
We own our corporate headquarters in Santa Paula, California. We own approximately 8,300 acres of farm land in California, with approximately 4,000 acres located in Ventura County, approximately 3,600 acres located in Tulare County in the San Joaquin Valley and approximately 700 acres in San Luis Obispo County. Additionally, we own approximately 1,200 acres located in Yuma, Arizona, 3,500 acres in La Serena, Chile and 1,200 acres in Jujuy, Argentina. In California, we lease approximately 30 acres of land located in Ventura County, approximately 80 acres in Tulare County and approximately 800 acres in San Bernardino County, and in Arizona we lease approximately 65 acres of land located in Yuma County. We also have an interest in a partnership that owns approximately 200 acres of land in Ventura County. The land used for agricultural plantings consists of approximately 6,100 acres of lemons, approximately 800 acres of avocados, approximately 1,000 acres of oranges and approximately 900 acres of specialty citrus and other crops. Our agribusiness land holdings are summarized below as of October 31, 2021 (in thousands, except per acre amounts):
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| Ranch Name | Acres | Book Value | Acquisition Date | Book Value per Acre | ||||||||||||||||||||||
| Limoneira/Olivelands Ranch | 1,700 | $ | 767 | 1907, 1913, 1920 | $ | 451 | ||||||||||||||||||||
| La Campana Ranch | 300 | 758 | 1964 | $ | 2,527 | |||||||||||||||||||||
| Orchard Farm Ranch | 1,100 | 3,240 | 1990 | $ | 2,945 | |||||||||||||||||||||
| Rancho La Cuesta Ranch | 200 | 2,899 | 1994 | $ | 14,495 | |||||||||||||||||||||
| Porterville Ranch | 700 | 6,427 | 1997 | $ | 9,181 | |||||||||||||||||||||
| Ducor Ranch | 900 | 6,064 | 1997 | $ | 6,738 | |||||||||||||||||||||
| Jencks Ranch | 100 | 846 | 2007 | $ | 8,460 | |||||||||||||||||||||
| Windfall Farms | 700 | 16,162 | 2009 | $ | 23,089 | |||||||||||||||||||||
| Stage Coach Ranch | 100 | 603 | 2012 | $ | 6,030 | |||||||||||||||||||||
| Martinez Ranch | 200 | 1,363 | 2012 | $ | 6,815 | |||||||||||||||||||||
| Associated Citrus Packers | 1,300 | 15,035 | 2013 | $ | 11,565 | |||||||||||||||||||||
| Lemons 400 | 800 | 5,180 | 2013 | $ | 6,475 | |||||||||||||||||||||
| Sheldon Ranches | 600 | 9,618 | 2016 | $ | 15,678 | |||||||||||||||||||||
| Pan de Azucar | 200 | 2,421 | 2017 | $ | 12,105 | |||||||||||||||||||||
| San Pablo | 3,300 | 8,208 | 2018 | $ | 2,487 | |||||||||||||||||||||
| Santa Clara | 1,200 | 8,600 | 2019 | $ | 7,167 | |||||||||||||||||||||
| Other agribusiness land | 400 | 1,296 | various | $ | 3,240 | |||||||||||||||||||||
| 13,800 | $ | 89,487 | ||||||||||||||||||||||||
The book value of our agribusiness land holdings of approximately $89.5 million differs from the land balance of $95.9 million included in property, plant and equipment in the notes to the consolidated financial statements in Item 8 of this Annual Report. The table above presents our current land holdings in farming agribusiness operations and, therefore, excludes Oxnard Lemon land, rental and real estate development land.
We own our packing facilities located in Santa Paula and Oxnard, California and Yuma, Arizona, where we process and pack our lemons as well as lemons for other growers. We commissioned a new lemon packing facility in 2016 to increase capacity and efficiency of our lemon packing operations. We have a 5.5 acre, one-megawatt ground-based photovoltaic solar generator, which provides the majority of the power to operate our packing facility. We also have a one-megawatt solar array that provides us with a majority of the electricity required to operate four deep water well pumps at one of our ranches in the San Joaquin Valley.
We own 256 residential units in Ventura and Tulare Counties that we lease to our employees, former employees and outside tenants and we own several commercial office buildings and properties that are leased to various tenants.
We own real estate development property in the California counties of Santa Barbara and Ventura. These properties are in various stages of development for up to approximately 900 residential units and approximately 811,000 square feet of commercial space.
Water and Mineral Rights
Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. We believe we have adequate supplies of water for our agribusiness segments as well as our rental and real estate development activities. Water for our farming operations located in Ventura County, California is sourced from the existing water resources associated with our land, which includes approximately 8,600 acre-feet of adjudicated water rights in the Santa Paula Basin (aquifer) and the un-adjudicated Fillmore Basin. We use a combination of ground water provided by wells that derive water from the San Joaquin Valley Basin and water from various water districts and irrigation districts in Tulare County, California, which is in the agriculturally productive San Joaquin Valley. We use ground water provided by wells that derive water from the Cadiz Valley Basin at the Cadiz Ranch in San Bernardino County, California. Our Windfall Farms property located in San Luis Obispo County, California obtains water from wells that derive water from the Paso Robles Basin. Our Associated farming operations in Yuma, Arizona source water from the Colorado River through the YMIDD, where we have access to approximately 11,700 acre feet of Class 3 Colorado River water rights. We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in La Serena, Chile and our Trapani Fresh farming operations in Argentina.
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Our rights to extract groundwater from the Santa Paula Basin are governed by the Santa Paula Basin Judgment (the “Judgment”). The Judgment was entered into in 1996 by stipulation among the United Water Conservation District, the City of Ventura and various members of the Santa Paula Basin Pumpers Association (the “Association”). The Association is a not-for-profit, mutual benefit corporation, which represents the interests of all overlying landowners with rights to extract groundwater from the Santa Paula Basin and the City of Santa Paula. We are a member of the Association. Membership in the Association is governed by the Association's Bylaws.
The Judgment adjudicated and allocated water rights in the Santa Paula Basin among the Association's members and the City of Ventura. The water rights are established and governed by a seven-year moving average (i.e., production can rise or fall in any particular year so long as the seven-year average is not exceeded). Under California law, the water rights are considered "property". A perpetual right to water, evidenced by the Judgment, can be exchanged for interests in real property under IRS Code Section 1031 and if condemned by a public agency, just compensation must be paid to the rightful owner. Our rights under the Judgment are perpetual and considered very firm and reliable which reflects favorably upon their fair market value.
For ease of administration, the Association is appointed by the Judgment as the trustee of its members’ water rights and is responsible for coordinating and promoting the interests of its members. The Judgment includes provisions for staged reductions in production rights should shortage conditions develop. It also allows the adjudicated water rights to be leased or sold among the parties. The Judgment established a Technical Advisory Committee composed of the United Water Conservation District, the City of Ventura and the Association to assist the Superior Court of the State of California, Ventura County (the “Court”), with the technical aspects of Santa Paula Basin management. Finally, the Judgment reserves continuing jurisdiction to the Court to hear motions for enforcement or modification of the Judgment as necessary.
Our California water resources include approximately 17,000 acre-feet of water affiliated with our owned properties, of which approximately 8,600 acre-feet are adjudicated. Our Yuma, Arizona water resources include approximately 11,700 acre-feet of water sourced from the Colorado River. We own shares in five not-for-profit mutual benefit water companies. Our investments in these water companies provide us with the right to receive a proportionate share of water from each of the water companies.
We believe water is a natural resource that is critical to economic growth in the western United States and firm, reliable water rights are essential to our sustainable business practices. Consequently, we have long been a private steward and advocate of prudent and efficient water management. We have made substantial investments in securing water and water rights in quantities that are sufficient to support and, we believe will exceed, our long-term business objectives. We strive to follow best management practices for the diversion, conveyance, distribution and use of water. In the future, we intend to continue to provide leadership in the area of, and seek innovation opportunities that promote, increased water use efficiency and the development of new sources of supply for our neighboring communities.
Item 3. Legal Proceedings
We are from time to time involved in legal proceedings arising in the normal course of business. Other than proceedings incidental to our business, we are not a party to, nor is any of our property the subject of, any material pending legal proceedings, and no such proceedings are, to our knowledge, contemplated by governmental authorities.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on The NASDAQ Stock Market LLC (“NASDAQ”) under the symbol “LMNR.” There is no assurance that our common stock will continue to be traded on NASDAQ or that any liquidity will exist for our stockholders.
Holders
On December 31, 2021, there were approximately 228 registered holders of our common stock. The number of registered holders includes banks and brokers who act as nominees, each of whom may represent more than one stockholder.
Dividends
The following table presents cash dividends per common share declared and paid in the periods shown.
| Dividend | |||||
| 2021 | |||||
| Fourth Quarter Ended October 31, 2021 | $ | 0.075 | |||
| Third Quarter Ended July 31, 2021 | $ | 0.075 | |||
| Second Quarter Ended April 30, 2021 | $ | 0.075 | |||
| First Quarter Ended January 31, 2021 | $ | 0.075 | |||
| 2020 | |||||
| Fourth Quarter Ended October 31, 2020 | $ | 0.075 | |||
| Third Quarter Ended July 31, 2020 | $ | 0.075 | |||
| Second Quarter Ended April 30, 2020 | $ | 0.075 | |||
| First Quarter Ended January 31, 2020 | $ | 0.075 | |||
In December 2021, we declared our quarterly dividend of $0.075 per common share and we expect to continue to pay quarterly dividends at a similar rate to the extent permitted by the financial results of our business and other factors beyond management’s control.
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Performance Graph
The line graph above compares the percentage change in cumulative total stockholder return of our common stock registered under section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with (i) the cumulative total return of the Russell 2000 Index, assuming reinvestment of dividends, and (ii) the cumulative total return of Dow Jones U.S. Food Producers Index, assuming reinvestment of dividends.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
None.
Item 6. Reserved
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10-K). This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under “Risk Factors” included in Item 1A and elsewhere in this Annual Report on Form 10-K. This section generally discusses the results of operations for fiscal year 2021 compared to fiscal year 2020. For discussion related to the results of operations and changes in financial condition for fiscal year 2020 compared to fiscal year 2019 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on January 14, 2021.
Overview
Limoneira Company, a Delaware corporation, is the successor to several businesses with operations in California since 1893. We are primarily an agribusiness company founded and based in Santa Paula, California, committed to responsibly using and managing our approximately 15,400 acres of land, water resources and other assets to maximize long-term stockholder value. Our current operations consist of fruit production, sales and marketing, rental operations, real estate and capital investment activities.
We have three business divisions: agribusiness, rental operations and real estate development. The agribusiness division is comprised of four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness, which includes oranges, specialty citrus and other crops. The agribusiness division includes our core operations of farming, harvesting, lemon packing and lemon sales operations. The rental operations division includes our residential and commercial rentals comprised of 256 completed rental units, leased land operations and organic recycling. The real estate development division includes our investments in real estate development projects. Generally, we see our Company as a land and farming company that generates annual cash flows to support our progress into diversified real estate development activities. As real estate developments are monetized, our agriculture business will then be able to expand more rapidly into new regions and markets.
Recent Developments – Refer to Part I, Item 1 “Fiscal Year 2021 Highlights and Recent Developments”
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Results of Operations
The following table shows the results of operations for ($ in thousands):
| Years Ended October 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Agribusiness | $ | 161,381 | 97% | $ | 159,937 | 97% | $ | 166,549 | 97% | ||||||||||||||||||||||||||
| Other operations | 4,646 | 3% | 4,622 | 3% | 4,849 | 3% | |||||||||||||||||||||||||||||
| Total net revenues | 166,027 | 100% | 164,559 | 100% | 171,398 | 100% | |||||||||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||||||||||||||
| Agribusiness | 148,492 | 86% | 157,281 | 86% | 152,372 | 86% | |||||||||||||||||||||||||||||
| Other operations | 4,332 | 3% | 4,504 | 2% | 4,439 | 3% | |||||||||||||||||||||||||||||
| Loss (gain) on disposal of assets | 109 | — | 502 | — | (1,069) | (1)% | |||||||||||||||||||||||||||||
| Selling, general and administrative | 19,427 | 11% | 21,280 | 12% | 21,170 | 12% | |||||||||||||||||||||||||||||
| Total costs and expenses | 172,360 | 100% | 183,567 | 100% | 176,912 | 100% | |||||||||||||||||||||||||||||
| Operating loss: | |||||||||||||||||||||||||||||||||||
| Agribusiness | 12,889 | 2,656 | 14,177 | ||||||||||||||||||||||||||||||||
| Other operations | 314 | 118 | 410 | ||||||||||||||||||||||||||||||||
| Loss (gain) on disposal of assets | (109) | (502) | 1,069 | ||||||||||||||||||||||||||||||||
| Selling, general and administrative | (19,427) | (21,280) | (21,170) | ||||||||||||||||||||||||||||||||
| Operating loss | (6,333) | (19,008) | (5,514) | ||||||||||||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||||||||||||||
| Interest income | 379 | 362 | 207 | ||||||||||||||||||||||||||||||||
| Interest expense, net of patronage dividends | (1,501) | (2,048) | (2,341) | ||||||||||||||||||||||||||||||||
| Equity in earnings of investments, net | 3,203 | 339 | 3,073 | ||||||||||||||||||||||||||||||||
| Loss on stock in Calavo Growers, Inc. | — | (6,299) | (2,117) | ||||||||||||||||||||||||||||||||
| Other income, net | 89 | 219 | 129 | ||||||||||||||||||||||||||||||||
| Total other income (expense) | 2,170 | (7,427) | (1,049) | ||||||||||||||||||||||||||||||||
| Loss before income tax benefit | (4,163) | (26,435) | (6,563) | ||||||||||||||||||||||||||||||||
| Income tax benefit | 266 | 8,494 | 1,097 | ||||||||||||||||||||||||||||||||
| Net loss | (3,897) | (17,941) | (5,466) | ||||||||||||||||||||||||||||||||
| Loss (income) attributable to noncontrolling interest | 456 | 1,506 | (477) | ||||||||||||||||||||||||||||||||
| Net loss attributable to Limoneira Company | $ | (3,441) | $ | (16,435) | $ | (5,943) | |||||||||||||||||||||||||||||
Non-GAAP Financial Measures
Due to significant depreciable assets associated with the nature of our operations and interest costs associated with our capital structure, management believes that earnings before interest, income taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA, which excludes loss on stock in Calavo Growers, Inc. ("Calavo") and loss (gain) on disposal of assets, is an important measure to evaluate our results of operations between periods on a more comparable basis. Adjusted EBITDA in previous periods also excluded LLCB earnings in equity investment which is no longer excluded due to management’s anticipation of future cash distributions related to the investment in LLCB. Adjusted EBITDA for prior periods has been restated to conform to the current presentation. Such measurements are not prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and should not be construed as an alternative to reported results determined in accordance with GAAP. The non-GAAP information provided is unique to us and may not be consistent with methodologies used by other companies.
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EBITDA and adjusted EBITDA are summarized and reconciled to net loss attributable to Limoneira Company which management considers to be the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands):
| Years Ended October 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net loss attributable to Limoneira Company | $ | (3,441) | $ | (16,435) | $ | (5,943) | |||||||||||
| Interest income | (379) | (362) | (207) | ||||||||||||||
| Interest expense, net of patronage dividends | 1,501 | 2,048 | 2,341 | ||||||||||||||
| Income tax benefit | (266) | (8,494) | (1,097) | ||||||||||||||
| Depreciation and amortization | 9,812 | 10,097 | 8,633 | ||||||||||||||
| EBITDA | 7,227 | (13,146) | 3,727 | ||||||||||||||
| Loss on stock in Calavo Growers, Inc. | — | 6,299 | 2,054 | ||||||||||||||
| Loss (gain) on disposal of assets | 109 | 502 | (991) | ||||||||||||||
| Adjusted EBITDA | $ | 7,336 | $ | (6,345) | $ | 4,790 | |||||||||||
Fiscal Year 2021 Compared to Fiscal Year 2020
Revenues
Total revenues for fiscal year 2021 were $166.0 million compared to $164.6 million for fiscal year 2020. The 1% increase of $1.5 million was primarily the result of increased lemons and specialty citrus and other crops agribusiness revenues, partially offset by decreased avocados and oranges agribusiness revenues, as detailed below ($ in thousands):
| Agribusiness Revenues for the Years Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||||||||
| Lemons | $ | 142,962 | $ | 137,563 | $ | 5,399 | 4% | ||||||||||||||||
| Avocados | 6,784 | 8,806 | (2,022) | (23)% | |||||||||||||||||||
| Oranges | 4,382 | 7,722 | (3,340) | (43)% | |||||||||||||||||||
| Specialty citrus and other crops | 7,253 | 5,846 | 1,407 | 24% | |||||||||||||||||||
| Agribusiness revenues | $ | 161,381 | $ | 159,937 | $ | 1,444 | 1% | ||||||||||||||||
•Lemons: The increase in fiscal year 2021 was primarily the result of increased brokered fruit and other lemon sales, partially offset by decreased fresh lemon sales, compared to fiscal year 2020. Brokered fruit and other lemon sales for fiscal years 2021 and 2020 were $36.0 million and $18.9 million, respectively. The increase in brokered fruit in fiscal year 2021 was primarily the result of higher volume and higher prices of brokered fruit sales, compared to fiscal year 2020. During fiscal years 2021 and 2020, brokered fruit sales were $29.3 million and $12.2 million on 1.4 million and 0.6 million cartons of brokered fruit sold at average per carton prices of $21.63 and $19.82, respectively. The decrease in fresh lemon sales in fiscal year 2021 was primarily the result of lower volume, partially offset by higher prices of fresh lemons sold, compared to fiscal year 2020. During fiscal years 2021 and 2020, fresh lemon sales were $85.9 million and $101.1 million on 4.4 million and 5.5 million cartons of fresh lemons packed and sold at average per carton prices of $19.60 and $18.32, respectively. Lemon revenues in fiscal years 2021 and 2020 included shipping and handling of $17.5 million and $13.4 million and lemon by-products of $3.5 million and $4.1 million, respectively.
•Avocados: The decrease in fiscal year 2021 was primarily the result of lower volume, partially offset by higher prices of avocados sold, compared to fiscal year 2020. The California avocado crop typically experiences alternating years of high and low production due to plant physiology. During fiscal years 2021 and 2020, 5.7 million and 8.0 million pounds of avocados were sold at average per pound prices of $1.20 and $1.10, respectively. Higher prices in fiscal year 2021 were primarily related to lower supply of fruit in the marketplace.
•Oranges: The decrease in fiscal year 2021 was primarily due to lower prices and volume of oranges sold, compared to fiscal year 2020. During fiscal years 2021 and 2020, sales consisted of 545,000 and 743,000 40-pound carton equivalents of oranges sold at average per carton prices of $8.04 and $10.39, respectively.
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•Specialty citrus and other crops: The increase in fiscal year 2021 was primarily the result of higher volume of wine grapes sold, compared to fiscal year 2020. In fiscal year 2021, we sold approximately 2,164 tons of wine grapes for $3.0 million compared to approximately 1,610 tons of wine grapes for $1.5 million in fiscal year 2020.
Other operations revenue in fiscal year 2021 was similar to fiscal year 2020.
Costs and Expenses
Total costs and expenses for fiscal year 2021 were $172.4 million compared to $183.6 million for fiscal year 2020. This 6% decrease of $11.2 million was primarily attributable to decreases in our agribusiness costs and selling, general and administrative expenses. Costs associated with our agribusiness division include packing costs, harvest costs, growing costs, costs related to the lemons we procure from third-party growers and suppliers and depreciation and amortization expense. These costs are discussed further below ($ in thousands):
| Agribusiness Costs and Expenses for the Years Ended October 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||||||||
| Packing costs | $ | 38,754 | $ | 45,545 | $ | (6,791) | (15)% | ||||||||||||||||
| Harvest costs | 17,227 | 20,714 | (3,487) | (17)% | |||||||||||||||||||
| Growing costs | 27,195 | 27,861 | (666) | (2)% | |||||||||||||||||||
| Third-party grower and supplier costs | 56,690 | 54,218 | 2,472 | 5% | |||||||||||||||||||
| Depreciation and amortization | 8,626 | 8,943 | (317) | (4)% | |||||||||||||||||||
| Agribusiness costs and expenses | $ | 148,492 | $ | 157,281 | $ | (8,789) | (6)% | ||||||||||||||||
•Packing costs: Packing costs consist of the costs to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. Lemon packing costs were $36.0 million and $42.6 million in fiscal years 2021 and 2020, respectively. The decrease in fiscal year 2021 was primarily attributable to lower volume of fresh lemons packed and sold, partially offset by higher average per carton costs, compared to fiscal year 2020. In fiscal years 2021 and 2020, we packed and sold 4.4 million and 5.5 million cartons of lemons at average per carton costs of $8.22 and $7.71, respectively. The increase in average per carton costs in fiscal year 2021, compared to fiscal year 2020, was primarily due to decreased volume of lemons packed and sold. Additionally, in fiscal years 2021 and 2020, packing costs included $2.7 million and $3.0 million of shipping costs, respectively.
•Harvest costs: The decrease in fiscal year 2021 was primarily attributable to decreased volume of lemons, avocados and oranges harvested compared to fiscal year 2020.
•Growing costs: Growing costs, also referred to as cultural costs, consist of orchard maintenance costs such as cultivation, fertilization and soil amendments, pest control, pruning and irrigation. The decrease in fiscal year 2021 compared to fiscal year 2020 reflects farm management decisions based on weather, harvest timing and crop conditions.
•Third-party grower and supplier costs: We sell fruit that we grow and fruit that we procure from other growers and suppliers. The cost of procuring fruit from others is referred to as third-party grower and supplier costs. The increase in fiscal year 2021 was primarily due to increased volume of fruit procured from suppliers, partially offset by decreased volume of fruit procured from third party growers, compared to fiscal year 2020. In fiscal years 2021 and 2020, costs for purchased, packed fruit for resale increased by $9.8 million; we incurred costs of $25.2 million and $15.5 million, respectively. During fiscal years 2021 and 2020, of the 4.4 million and 5.5 million lemon cartons sold, 2.3 million (52%) and 3.3 million (60%) were procured from third-party growers at average per carton prices of $13.83 and $11.71, respectively: a decrease of $7.3 million.
•Depreciation and amortization: Depreciation and amortization expense in fiscal year 2021 was $0.3 million lower than fiscal year 2020.
Other operations expenses for fiscal years 2021 and 2020 were $4.3 million and $4.5 million, respectively.
Loss on disposal of assets for fiscal years 2021 and 2020 were $0.1 million and $0.5 million, respectively.
Selling, general and administrative expenses for fiscal year 2021 were $19.4 million compared to $21.3 million for fiscal year 2020. The $1.9 million decrease was primarily the result of:
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•$0.7 million decrease in hardware, software and training costs associated with an ERP implementation
•$0.6 million decrease in selling expenses; and
•$0.5 million decrease in other selling, general and administrative expenses, including certain corporate overhead expenses.
Other Income (Expense)
Other income (expense), for fiscal year 2021 was $2.2 million compared to $(7.4) million for fiscal year 2020. The $9.6 million increase in other income (expense) was primarily the result of:
•$0.5 million decrease in interest expense as a result of increased amounts capitalized;
•$2.9 million increase in equity in earnings of investments primarily from LLCB; and
•$6.3 million decrease in the loss on stock in Calavo.
Income Taxes
We recorded for fiscal years 2021 and 2020 income tax benefit of $0.3 million and $8.5 million on pre-tax loss of $4.2 million and $26.4 million, respectively. The tax provision recorded for fiscal year 2021 differs from the U.S. federal statutory tax rate of 21% due primarily to foreign jurisdictions which are taxed at different rates, state taxes, nondeductible tax items and valuation allowances on certain deferred tax assets of foreign subsidiaries. Our effective tax rate for fiscal years 2021 and 2020 was 6.4% and 32.2%, respectively.
Loss (Income) Attributable to Noncontrolling Interest
Loss (income) attributable to noncontrolling interest primarily represents 10% and 49% of the net losses of PDA and Trapani Fresh, respectively.
Segment Results of Operations
We operate in four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness. Our reportable operating segments are strategic business units with different products and services, distribution processes and customer bases. We evaluate the performance of our operating segments separately to monitor the different factors affecting financial results. Each segment is subject to review and evaluations related to current market conditions, market opportunities and available resources. See Note 22 - Segment Information of the notes to consolidated financial statements included in this Annual Report for additional information regarding our operating segments.
Segment information for fiscal year 2021 (in thousands):
| Fresh Lemons | Lemon Packing | Eliminations | Avocados | Other Agribusiness | Total Agribusiness | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 125,448 | $ | 17,514 | $ | — | $ | 6,784 | $ | 11,635 | $ | 161,381 | $ | 4,646 | $ | 166,027 | |||||||||||||||||||||||||||||||
| Intersegment revenues | — | 25,637 | (25,637) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total net revenues | 125,448 | 43,151 | (25,637) | 6,784 | 11,635 | 161,381 | 4,646 | 166,027 | |||||||||||||||||||||||||||||||||||||||
| Costs and expenses | 116,117 | 36,018 | (25,637) | 4,211 | 9,157 | 139,866 | 22,682 | 162,548 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | — | — | — | — | — | 8,626 | 1,186 | 9,812 | |||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 9,331 | $ | 7,133 | $ | — | $ | 2,573 | $ | 2,478 | $ | 12,889 | $ | (19,222) | $ | (6,333) | |||||||||||||||||||||||||||||||
Segment information for fiscal year 2020 (in thousands):
| Fresh Lemons | Lemon Packing | Eliminations | Avocados | Other Agribusiness | Total Agribusiness | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 124,150 | $ | 13,413 | $ | — | $ | 8,806 | $ | 13,568 | $ | 159,937 | $ | 4,622 | $ | 164,559 | |||||||||||||||||||||||||||||||
| Intersegment revenues | — | 36,820 | (36,820) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total net revenues | 124,150 | 50,233 | (36,820) | 8,806 | 13,568 | 159,937 | 4,622 | 164,559 | |||||||||||||||||||||||||||||||||||||||
| Costs and expenses | 125,305 | 42,563 | (36,820) | 5,168 | 12,122 | 148,338 | 25,132 | 173,470 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | — | — | — | — | — | 8,943 | 1,154 | 10,097 | |||||||||||||||||||||||||||||||||||||||
| Operating (loss) income | $ | (1,155) | $ | 7,670 | $ | — | $ | 3,638 | $ | 1,446 | $ | 2,656 | $ | (21,664) | $ | (19,008) | |||||||||||||||||||||||||||||||
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Fiscal Year 2021 Compared to Fiscal Year 2020
The following analysis should be read in conjunction with the previous section “Results of Operations.”
Fresh Lemons
Fresh lemons segment revenue is comprised of sales of fresh lemons, lemon by-products and brokered fruit other lemon revenue. For fiscal year 2021, our fresh lemons segment revenue was $125.4 million compared to $124.2 million for fiscal year 2020. The 1% increase of $1.3 million was primarily the result of higher prices partially offset by lower volume of fresh lemons sold, as discussed earlier.
Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs, cost of fruit we procure from third-party growers and suppliers, transportation costs and packing service charges incurred from the lemon packing segment to pack lemons for sale. For fiscal year 2021, our fresh lemon costs and expenses were $116.1 million compared to $125.3 million for fiscal year 2020. The 7% decrease of $9.2 million primarily consisted of the following:
•Harvest costs for fiscal year 2021 were $2.8 million lower than fiscal year 2020.
•Growing costs for fiscal year 2021 were $0.7 million higher than fiscal year 2020.
•Third-party grower and supplier costs for fiscal year 2021 were $4.4 million higher than fiscal year 2020.
•Transportation costs for fiscal year 2021 were $0.2 million lower than fiscal year 2020.
•Intersegment costs and expenses for fiscal year 2021 were $11.2 million lower than fiscal year 2020.
Lemon Packing
Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For fiscal year 2021, our lemon packing segment revenue was $43.2 million compared to $50.2 million for fiscal year 2020. The 14% decrease of $7.1 million was primarily due to decreased volume of lemons packed.
Costs and expenses associated with our lemon packing segment consist of the cost to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. For fiscal year 2021, our lemon packing costs and expenses were $36.0 million compared to $42.6 million for fiscal year 2020. The 15% decrease of $6.5 million was primarily due to decreased volume of lemons packed.
Lemon packing segment operating income per carton sold was $1.63 and $1.39 for fiscal years 2021 and 2020, respectively.
The lemon packing segment included $25.6 million and $36.8 million of intersegment revenues for fiscal years 2021 and 2020, respectively, which were charged to the fresh lemons segment to pack lemons for sale. Such intersegment revenues and expenses are eliminated in our consolidated financial statements.
Avocados
For fiscal year 2021, our avocados segment revenue was $6.8 million compared to $8.8 million for fiscal year 2020, a 23% decrease of $2.0 million.
Cost and expenses associated with our avocados segment include harvest costs and growing costs. For fiscal year 2021, our avocado costs and expenses were $4.2 million compared to $5.2 million for fiscal year 2020. The 19% decrease of $1.0 million primarily consisted of the following:
•Harvest costs for fiscal year 2021 were $0.4 million lower than fiscal year 2020.
•Growing costs for fiscal year 2021 were $0.5 million lower than fiscal year 2020.
Other Agribusiness
For fiscal year 2021, our other agribusiness segment revenue was $11.6 million compared to $13.6 million for fiscal year 2020. The 14% decrease of $1.9 million primarily consisted of the following:
•Orange revenue for fiscal year 2021 was $3.3 million lower than fiscal year 2020.
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•Specialty citrus and other crop revenue for fiscal year 2021 was $1.4 million higher than fiscal year 2020.
Costs and expenses associated with our other agribusiness segment include harvest, growing and purchased fruit costs. Our other agribusiness costs and expenses for fiscal year 2021 were $9.2 million compared to $12.1 million for fiscal year 2020. The 24% decrease of $3.0 million primarily consisted of the following:
•Harvest costs for fiscal year 2021 were $0.3 million lower than fiscal year 2020.
•Growing costs for fiscal year 2021 were $0.8 million lower than fiscal year 2020.
•Purchased fruit costs for fiscal year 2021 were $1.9 million lower than fiscal year 2020.
Total agribusiness depreciation and amortization for fiscal year 2021 was $8.6 million compared to $8.9 million in fiscal year 2020. The 4% decrease of $0.3 million was primarily due to reduced amortization as a result of selling and licensing certain intangible assets of Trapani Fresh to FGF in March 2021.
Corporate and Other
Our corporate and other operations had rental revenues of approximately $4.6 million in fiscal years 2021 and 2020.
Costs and expenses in our corporate and other operations were approximately $22.7 million and $25.1 million in fiscal years 2021 and 2020, respectively, and include rental operations costs and selling, general and administrative expenses not allocated to the operating segments. Depreciation and amortization expenses were approximately $1.2 million in fiscal years 2021 and 2020. Additionally, loss on disposal of assets for fiscal years 2021 and 2020 was $0.1 million and $0.5 million, respectively.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash and cash flows generated from our operations and use of our revolving credit facility. Our liquidity and capital position fluctuates during the year depending on seasonal production cycles, weather events and demand for our products. Typically, our first and last fiscal quarters coincide with the fall and winter months during which we are growing crops that are harvested and sold in the spring and summer, which are our second and third quarters. To meet working capital demand and investment requirements of our agribusiness and real estate development projects and to supplement operating cash flows, we utilize our revolving credit facility to fund agricultural inputs and farm management practices until sufficient returns from crops allow us to repay amounts borrowed. Raw materials needed to propagate the various crops grown by us consist primarily of fertilizer, herbicides, insecticides, fuel and water, all of which are readily available from local sources.
Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term fixed rate and variable rate debt and related interest payments, operating and finance leases and our noncontributory, defined benefit pension plan (“the Plan”). In fiscal year 2021, we decided to terminate the Plan effective December 31, 2021. The liabilities disclosed as of October 31, 2021, reflect an estimate of the additional cost to pay lump sums to a portion of the active and vested terminated participants and purchase annuities for all remaining participants from an insurance company. See Notes 12, 13 and 17 to the consolidated financial statements included in this Annual Report for amounts outstanding on October 31, 2021, related to debt, leases and the Plan. Purchase obligations consist of contracts primarily related to packing supplies and pollination services, the majority of which are due in the next three years.
We believe that the cash flows from operations and available borrowing capacity from our existing credit facilities will be sufficient to satisfy our capital expenditures, debt service, working capital needs and other contractual obligations for the next twelve months. In addition, we have the ability to control a portion of our investing cash flows to the extent necessary based on our liquidity demands.
Cash Flows from Operating Activities
For the fiscal years ended October 31, 2021, 2020 and 2019, net cash provided by (used in) operating activities was $9.6 million, $(11.3) million and $1.4 million, respectively. Our cash flow provided by operating activities is primarily from agricultural sales and rental operations. Cash flow used in operations generally consists of agribusiness costs, rental operation costs, selling, general and administrative expenses. The significant components of our cash flows provided by operating activities are as follows:
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•Net loss was $(3.9) million and $(17.9) million for fiscal years 2021 and 2020, respectively. The components of net loss in fiscal year 2021 compared to fiscal year 2020 consist of an decrease in operating loss of $12.7 million, an increase in total other income (expense) of $9.6 million and a decrease in income tax benefit of $8.2 million.
•The adjustments to reconcile net loss to net cash provided by (used in) operating activities provided $10.2 million of cash in fiscal year 2021 compared to providing $17.6 million of cash in fiscal year 2020, primarily due to significant changes in loss on stock in Calavo, equity in earnings of investments, net and deferred income taxes.
•The changes in operating assets and liabilities, net of business combinations provided $3.3 million of operating cash in fiscal year 2021 compared to using $11.0 million of operating cash in fiscal year 2020, primarily due to significant changes in accounts receivable and receivables/other from related parties, cultural costs, income tax receivable, and accounts payable and growers and suppliers payable.
Cash Flows from Investing Activities
For the years ended October 31, 2021, 2020 and 2019, net cash (used in) provided by investing activities was $(10.2) million, $3.8 million and $(23.7) million, respectively, and is primarily comprised of capital expenditures, business acquisitions, sales of assets and investments.
•Capital expenditures for fiscal year 2021 were comprised of $9.8 million for property, plant and equipment primarily related to orchard and real estate development projects. Additionally, in fiscal year 2021 we invested $0.7 million in mutual water companies and water rights.
•Capital expenditures for fiscal year 2020 were comprised of $10.6 million for property, plant and equipment primarily related to orchard and real estate development projects. Additionally, in fiscal year 2020, we received proceeds from sale of stock in Calavo of $11.0 million, proceeds from sales of property assets of $6.3 million and contributed $2.8 million to LLCB for the development of our East Area I real estate development project.
Cash Flows from Financing Activities
For the years ended October 31, 2021, 2020 and 2019 net cash provided by financing activities was $0.5 million, $7.4 million and $22.4 million, respectively.
•The $0.5 million of cash provided by financing activities for fiscal year 2021 is primarily comprised of net borrowings of long-term debt in the amount of $7.1 million. Additionally, we paid common and preferred dividends, in aggregate, of $5.8 million and paid $0.7 million for the exchange of common stock related to our employees restricted stock awards.
•The $7.4 million of cash provided by financing activities for fiscal year 2020 is primarily comprised of net borrowings of long-term debt in the amount of $17.0 million. Additionally, we paid common and preferred dividends, in aggregate, of $5.9 million and purchases of shares of our common stock of $3.5 million under our share repurchase program in fiscal year 2020.
Transactions Affecting Liquidity and Capital Resources
Credit Facilities and Long-Term Debt
We finance our working capital and other liquidity requirements primarily through cash from operations and our Farm Credit West Credit Facility, which includes the MLA, Supplements and Revolving Equity Line of Credit (the "RELOC"). In addition, we have the Farm Credit West term loans, Banco de Chile term loans and COVID-19 loans, and a note payable to the sellers of a land parcel. Additional information regarding these loans and the note payable can be found in Note 12 to the consolidated financial statements included in this Annual Report.
In June 2021, we entered into the MLA with Lender dated June 1, 2021, together with the Supplements and a Fixed Interest Rate Agreement. The MLA governs the terms of the Supplements. The MLA amends and restates the previous Master Loan Agreement between our Company and the Lender, dated June 19, 2017, and extends the principal repayment to July 1, 2026.
The Supplements and RELOC provide aggregate borrowing capacity of $130.0 million comprised of $75.0 million under the Revolving Credit Supplement, $40.0 million under the Non-Revolving Credit Supplement and $15.0 million under the RELOC. As of October 31, 2021, our outstanding borrowings under the Farm Credit West Credit Facility were $111.3 million and we had $18.7 million of availability.
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The MLA subjects us to affirmative and restrictive covenants including, among other customary covenants, financial reporting requirements, requirements to maintain and repair any collateral, restrictions on the sale of assets, restrictions on the use of proceeds, prohibitions on the incurrence of additional debt and restrictions on the purchase or sale of major assets of our business. We are also subject to a financial covenant that requires us to maintain compliance with a specified debt service coverage ratio on an annual basis. In December 2021, the Lender modified the covenant to defer measurement at October 31, 2021 and revert to a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2022.
In August 2021, we entered into the FCW term loan with the Lender and used the proceeds to pay off the Wells Fargo term loan. The FCW term loan has a fixed interest rate of 3.19% and is payable in monthly installments through September 2026.
In fiscal years 2021 and 2020 we received annual patronage dividends of $1.2 million and $1.6 million, respectively, from Farm Credit West.
Treasury Stock
In fiscal year 2021, our Company's Board of Directors approved a share repurchase program authorizing us to repurchase up to $10.0 million of our outstanding shares of common stock through September 2022; no shares have been repurchased under this program. In fiscal year 2020, we repurchased 250,977 shares for $3.5 million under a program which expired in March 2021.
Dividends
The holders of the Series B Convertible Preferred Stock (the “Series B Stock”) and the Series B-2 Preferred Stock (the “Series B-2 Preferred Stock”) are entitled to receive cumulative cash dividends. Such preferred dividends paid totaled $0.5 million in each of the fiscal years 2021 and 2020.
Cash dividends declared in each of the fiscal years 2021 and 2020 totaled $0.30 per common share and such dividends paid totaled $5.3 million and $5.4 million for fiscal years 2021 and 2020, respectively.
Real Estate Development Activities and Related Capital Resources
As noted under “Transactions Affecting Liquidity and Capital Resources,” we have the ability to control a portion of our investing cash flows to the extent necessary based upon our liquidity demands. In order for our real estate development operations to reach their maximum potential benefit to us, however, we will need to be successful over time in identifying other third party sources of capital to collaborate with us to move those development projects forward. While we are frequently in discussions with potential external sources of capital in respect to all of our development projects, current market conditions for California real estate projects make it difficult to predict the timing and amounts of future capital that will be required to complete the development of our projects.
In November 2015, we entered into a joint venture with Lewis for the residential development of our East Area I real estate development project. To consummate the transaction, we formed LLCB as the development entity, contributed our East Area I property to the joint venture and sold a 50% interest in the joint venture to Lewis for $20.0 million. We expect to receive approximately $100.0 million from LLCB over the estimated 10 to 12-year life of the project including $20.0 million received on the consummation of LLCB. LLCB's partners will share in capital contributions to fund project costs until loan proceeds and/or revenues are sufficient to fund the project. Since inception each partner has made funding contributions of $21.4 million, including $2.8 million in fiscal year 2020. The first phase of the project broke ground to commence mass grading in November 2017. Project plans currently include approximately 1,500 residential units and site improvements to be completed. Lot sales representing 232 and 144 residential units closed in fiscal years 2021 and 2020, respectively, and 586 residential units have closed from the project's inception to October 31, 2021.
Trend Information
The commodity pricing for our fresh produce, and therefore our revenues and margins, is significantly impacted by consumer demand. The worldwide fresh produce industry has historically enjoyed consistent underlying demand and favorable growth dynamics. In recent years, the market for fresh produce has increased faster than the rate of population growth, supported by ongoing trends including greater consumer demand for healthy, fresh and convenient foods, increased retailer square footage devoted to fresh produce, and greater emphasis on fresh produce as a differentiating factor in attracting customers. Health-conscious consumers are driving much of the growth in demand for fresh produce. Over the past several decades, the benefits of natural,
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preservative-free and organic foods have become an increasingly significant element of the public dialogue on health and nutrition. As a result, consumption of fresh fruit and vegetables has markedly increased. Conversely, a decrease in demand, as was seen during the COVID-19 pandemic as a result of restaurant closures, has the impact of reducing our pricing and therefore our revenues and margins.
Off-Balance Sheet Arrangements
As discussed in Note 7 – Real Estate Development and Note 8 – Equity in Investments of the notes to consolidated financial statements included in this Annual Report, we have investments in joint ventures and partnerships that are accounted for using the equity method of accounting.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to develop critical accounting policies and make certain estimates, assumptions and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates and judgments on historical experience, available relevant data and other information that we believe to be reasonable under the circumstances, and we continue to review and evaluate these estimates. Actual results may materially differ from these estimates under different assumptions or conditions as new or additional information become available in future periods. For further information on significant accounting policies, see discussion in Note 2 to the consolidated financial statements included in this Annual Report.
Impairment of Real Estate Development Projects – We evaluate our real estate development projects, held either by us or as included specifically within our investment in LLCB, for impairment on an ongoing basis. Our evaluation for impairment involves an initial assessment of each real estate development project to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of, or investment in, real estate development are no longer recoverable. Possible indications of impairment may include events or changes in circumstances affecting the entitlement process, zoning, government regulation, geographical demand for new housing or commercial property, and market conditions related to residential or commercial land lots. When events or changes in circumstances exist, we further evaluate the real estate development for impairment by a) comparing undiscounted future cash flows expected to be generated over the life of the real estate development to the respective carrying amount for its own real estate development or b) determining if its equity in investment has incurred an other-than-temporary decline.
We make significant judgments in evaluating each real estate development project, as held by us or within our investment in LLCB, for possible indications of impairment. These judgments may relate to the identification of appropriate and comparable market prices, the consideration of changes to legal factors or the business climate, the likelihood of successfully completing the entitlement process, changes in zoning or government regulation, and demand for new housing. Changes in these judgments could have a significant impact on real estate development or equity in investments. For fiscal years 2021, 2020 and 2019, no impairment loss has been recognized on any real estate development and no other-than-temporary-impairment has been recognized on our equity in LLCB.
The impairment calculation for real estate developments held by us compares the carrying value of the asset to the asset’s estimated future cash flows (undiscounted). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted). We recognize an impairment loss equal to the amount by which the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset will be its new cost basis. Restoration of a previously recognized impairment loss is prohibited. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to impairment losses that could be material to our results of operations.
Whenever events or changes in circumstances indicate that the carrying amount of our equity investment in LLCB might not be recoverable, then we determine whether an impairment is other-than-temporary. If we conclude the impairment is other-than-temporary, we determine the estimated fair value of the investment by performing a discounted cash flow or market approach analysis and recognize an other-than-temporary impairment to reduce the investment to its estimated fair value.
We believe that the accounting estimate related to impairment of real estate development projects held by us, or other-than-temporary impairment of our equity investment in LLCB, is a critical accounting estimate because it is very susceptible to change from period to period; it requires management to make assumptions about future prices, production, and costs, and the potential impact of a loss from impairment could be material to our earnings. Management’s assumptions regarding future cash flows from
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real estate development projects or return on equity of our investment in LLCB have fluctuated in the past due to changes in prices, production and costs and are expected to continue to do so in the future as market conditions change.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in this Annual Report for information concerning recent accounting pronouncements.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Borrowings under the Farm Credit West Credit Facility and Farm Credit West Term Loans are or will be subject to variable interest rates. These variable interest rates subject us to the risk of increased interest costs associated with any upward movements in interest rates. For the Farm Credit West Credit Facility and Farm Credit West Term Loans, our borrowing interest rate is an internally calculated rate based on Farm Credit West’s internal monthly operations and their cost of funds and generally follows the changes in the 90-day treasury rates in increments divisible by 0.25%. At October 31, 2021, our total debt outstanding under the Farm Credit West Credit Facility and the Farm Credit West Term Loans was $111.3 million and $18.2 million, respectively.
From time to time we enter into interest rate swap agreements to manage risks and costs associated with our financing activities.
Based on our level of borrowings at October 31, 2021, a 100 basis points increase in interest rates would increase our interest expense $0.7 million for fiscal year 2022 and an annual average of $0.8 million for the three subsequent fiscal years. Additionally, a 100 basis points increase in the interest rate would decrease our net income by $0.5 million for fiscal year 2022 and an annual average of $0.6 million for the three subsequent fiscal years. Refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information.
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Item 8. Financial Statements and Supplementary Data
Limoneira Company
Index to Consolidated Financial Statements
| Report of Independent Registered Public Accounting Firm | |||||
| Consolidated Financial Statements of Limoneira Company | |||||
| Consolidated Balance Sheets at October 31, 2021 and 2020 | |||||
| Consolidated Statements of Operations for the years ended October 31, 2021, 2020 and 2019 | |||||
| Consolidated Statements of Comprehensive Loss for the years ended October 31, 2021, 2020 and 2019 | |||||
| Consolidated Statements of Stockholders’ Equity and Temporary Equity for the years ended October 31, 2021, 2020 and 2019 | |||||
| Consolidated Statements of Cash Flows for the years ended October 31, 2021, 2020 and 2019 | |||||
| Notes to Consolidated Financial Statements | |||||
All schedules are omitted for the reason that they are not applicable or the required information is included in the Consolidated Financial Statements or the notes thereto.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Limoneira Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Limoneira Company and subsidiaries (the "Company") as of October 31, 2021 and 2020, the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity and temporary equity, and cash flows, for each of the three years in the period ended October 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, based on our audits and the report of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We did not audit the financial statements of Limoneira Lewis Community Builders, LLC (“LLCB”), the Company's investment in which is accounted for by use of the equity method. The accompanying consolidated financial statements of the Company include, before the basis difference and related amortization discussed in Note 8, its equity investment in LLCB of $51,416,000 and $46,908,000 as of October 31, 2021 and 2020, respectively, and its equity earnings in LLCB of $4,508,000, $1,386,000 and $4,368,000 for the years ended October 31, 2021, 2020 and 2019, respectively. The financial statements of LLCB were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Company’s equity investment and equity earnings in LLCB, is based on the report of the other auditors.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31, 2021, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 10, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Real Estate Development – Impairment Indicators – Refer to Notes 2, 5, 7 and 8 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of real estate development, as held by the Company or as included specifically within its investment in Limoneira Lewis Community Builders, LLC (“LLCB”), for impairment involves an initial assessment of each real estate
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development to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of, or investment in, real estate development are no longer recoverable. Possible indications of impairment may include events or changes in circumstances affecting the entitlement process, zoning, government regulation, geographical demand for new housing or commercial property, and market conditions related to pricing of residential or commercial land lots. When events or changes in circumstances exist, the Company further evaluates the real estate development for impairment by a) comparing undiscounted future cash flows expected to be generated over the life of the real estate development to the respective carrying amount for its own real estate development or b) determining if its equity in investment has incurred an other-than-temporary decline.
The Company makes significant judgments in evaluating real estate development for possible indications of impairment. These judgments may relate to the identification of appropriate and comparable market prices, the consideration of changes to legal factors or the business climate, the likelihood of successfully completing the entitlement process, changes in zoning or government regulation, and demand for new housing. Changes in these judgments could have a significant impact on real estate development. Real estate development assets were $22,828,000, and equity in investment in LLCB was $60,216,000 as of October 31, 2021. For the year ended October 31, 2021, no impairment loss has been recognized on any real estate development and no other-than-temporary-impairment has been recognized on the Company’s equity in LLCB.
We identified the management judgments used in the determination of impairment indicators for real estate development as a critical audit matter due to their significance and because of the subjectivity used by management when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of, or investment in, real estate development may not be recoverable. This required a high degree of auditor judgment when performing audit procedures to evaluate whether management appropriately identified impairment indicators.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of real estate development for possible indications of impairment included the following, among others:
•We tested the effectiveness of the controls over management’s identification of possible circumstances that may indicate that real estate development is no longer recoverable, including controls over management’s evaluation of the entitlement process, litigation, changes in zoning, government regulation, geographical demand for new housing or commercial property and market conditions related to pricing of residential or commercial land lots.
▪We evaluated management’s impairment analysis by:
◦Searching for adverse asset-specific and/or market conditions by reviewing publicly available information on home values and land values in the surrounding regions of the development, periodicals and news information relating to the Southern California housing market, other independent market data, including considerations of the demand for housing in the market and changes to comparable home prices
◦Obtaining information from legal counsel and performing inquiries with management in order to evaluate any changes in the status of litigation matters affecting the development properties and the potential impact on the ability to recover the accumulated costs, including any relevant government regulations and/or other matters impacting the entitlement process
◦With the assistance of our fair value specialists, we evaluated comparable land sales for both commercial and residential lots in the area as well as cost to develop residential lot information and compared it to information used by management
◦Developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis
| /s/ Deloitte & Touche LLP | ||||||||
Los Angeles, California
January 10, 2022
We have served as the Company’s auditor since 2019.
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LIMONEIRA COMPANY
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share amounts)
| October 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 439 | $ | 501 | |||||||
| Accounts receivable, net | 17,483 | 16,261 | |||||||||
| Cultural costs | 7,500 | 6,865 | |||||||||
| Prepaid expenses and other current assets | 10,709 | 10,688 | |||||||||
| Receivables/other from related parties | 5,958 | 2,294 | |||||||||
| Income taxes receivable | — | 5,911 | |||||||||
| Total current assets | 42,089 | 42,520 | |||||||||
| Property, plant and equipment, net | 242,420 | 242,649 | |||||||||
| Real estate development | 22,828 | 21,636 | |||||||||
| Equity in investments | 64,072 | 61,214 | |||||||||
| Goodwill | 1,527 | 1,535 | |||||||||
| Intangible assets, net | 8,329 | 11,309 | |||||||||
| Other assets | 11,011 | 8,737 | |||||||||
| Total assets | $ | 392,276 | $ | 389,600 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 8,963 | $ | 5,838 | |||||||
| Growers and suppliers payable | 10,371 | 8,126 | |||||||||
| Accrued liabilities | 6,542 | 7,947 | |||||||||
| Payables to related parties | 6,976 | 6,273 | |||||||||
| Current portion of long-term debt | 2,472 | 3,277 | |||||||||
| Total current liabilities | 35,324 | 31,461 | |||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt, less current portion | 130,353 | 122,571 | |||||||||
| Deferred income taxes | 22,853 | 22,430 | |||||||||
| Other long-term liabilities | 4,501 | 6,568 | |||||||||
| Total liabilities | 193,031 | 183,030 | |||||||||
| Commitments and contingencies | — | — | |||||||||
Series B Convertible Preferred Stock – $100.00 par value (50,000 shares authorized: 14,790 shares issued and outstanding at October 31, 2021 and 2020) (8.75% coupon rate) | 1,479 | 1,479 | |||||||||
Series B-2 Convertible Preferred Stock – $100.00 par value (10,000 shares authorized: 9,300 shares issued and outstanding at October 31, 2021 and 2020) (4% dividend rate on liquidation value of $1,000 per share) | 9,331 | 9,331 | |||||||||
| Stockholders' equity: | |||||||||||
Series A Junior Participating Preferred Stock – $0.01 par value (20,000 shares authorized: zero issued or outstanding at October 31, 2021 and 2020) | — | — | |||||||||
Common Stock – $0.01 par value (39,000,000 shares authorized: 17,936,377 and 17,857,707 shares issued and 17,685,400 and 17,606,730 shares outstanding at October 31, 2021 and 2020, respectively) | 179 | 179 | |||||||||
| Additional paid-in capital | 163,965 | 162,084 | |||||||||
| Retained earnings | 21,552 | 30,797 | |||||||||
| Accumulated other comprehensive loss | (5,733) | (7,548) | |||||||||
Treasury stock, at cost, 250,977 shares at October 31, 2021 and 2020 | (3,493) | (3,493) | |||||||||
| Noncontrolling interest | 11,965 | 13,741 | |||||||||
| Total stockholders' equity | 188,435 | 195,760 | |||||||||
| Total liabilities and stockholders' Equity | $ | 392,276 | $ | 389,600 | |||||||
See Notes to Consolidated Financial Statements.
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LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except share amounts)
| Years Ended October 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Net revenues: | ||||||||||||||||||||
| $ | 161,381 | $ | 159,937 | $ | 166,549 | |||||||||||||||
| Other operations | 4,646 | 4,622 | 4,849 | |||||||||||||||||
| Total net revenues | 166,027 | 164,559 | 171,398 | |||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| 148,492 | 157,281 | 152,372 | ||||||||||||||||||
| Other operations | 4,332 | 4,504 | 4,439 | |||||||||||||||||
| Loss (gain) on disposal of assets | 109 | 502 | (1,069) | |||||||||||||||||
| Selling, general and administrative | 19,427 | 21,280 | 21,170 | |||||||||||||||||
| Total costs and expenses | 172,360 | 183,567 | 176,912 | |||||||||||||||||
| Operating loss | (6,333) | (19,008) | (5,514) | |||||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest income | 379 | 362 | 207 | |||||||||||||||||
| Interest expense, net of patronage dividends | (1,501) | (2,048) | (2,341) | |||||||||||||||||
| Equity in earnings of investments, net | 3,203 | 339 | 3,073 | |||||||||||||||||
| Loss on stock in Calavo Growers, Inc. | — | (6,299) | (2,117) | |||||||||||||||||
| Other income, net | 89 | 219 | 129 | |||||||||||||||||
| Total other income (expense) | 2,170 | (7,427) | (1,049) | |||||||||||||||||
| Loss before income tax benefit | (4,163) | (26,435) | (6,563) | |||||||||||||||||
| Income tax benefit | 266 | 8,494 | 1,097 | |||||||||||||||||
| Net loss | (3,897) | (17,941) | (5,466) | |||||||||||||||||
| Loss (income) attributable to noncontrolling interest | 456 | 1,506 | (477) | |||||||||||||||||
| Net loss attributable to Limoneira Company | (3,441) | (16,435) | (5,943) | |||||||||||||||||
| Preferred dividends | (501) | (501) | (501) | |||||||||||||||||
| Net loss applicable to common stock | $ | (3,942) | $ | (16,936) | $ | (6,444) | ||||||||||||||
| Basic net loss per common share | $ | (0.23) | $ | (0.96) | $ | (0.37) | ||||||||||||||
| Diluted net loss per common share | $ | (0.23) | $ | (0.96) | $ | (0.37) | ||||||||||||||
| Weighted-average common shares outstanding-basic | 17,555,000 | 17,666,000 | 17,580,000 | |||||||||||||||||
| Weighted-average common shares outstanding-diluted | 17,555,000 | 17,666,000 | 17,580,000 | |||||||||||||||||
See Notes to Consolidated Financial Statements.
47
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| Years Ended October 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Net loss | $ | (3,897) | $ | (17,941) | $ | (5,466) | ||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Foreign currency translation adjustments | (685) | (707) | (1,103) | |||||||||||||||||
Minimum pension liability adjustments, net of tax of $940, $(69) and $(252) | 2,500 | 274 | (607) | |||||||||||||||||
| Residual state tax effects on sale of equity securities | — | 140 | — | |||||||||||||||||
| Total other comprehensive income (loss), net of tax | 1,815 | (293) | (1,710) | |||||||||||||||||
| Comprehensive loss | (2,082) | (18,234) | (7,176) | |||||||||||||||||
| Comprehensive loss attributable to noncontrolling interest | 445 | 1,536 | 438 | |||||||||||||||||
| Comprehensive loss attributable to Limoneira Company | $ | (1,637) | $ | (16,698) | $ | (6,738) | ||||||||||||||
See Notes to Consolidated Financial Statements.
48
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY
($ in thousands)
| Stockholders’ Equity | Temporary Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In | Retained | Accumulated Other Comprehensive | Treasury | Non-controlling | Series B Preferred | Series B-2 Preferred | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | Stock | Interest | Total | Stock | Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at October 31, 2018 | 17,647,135 | $ | 176 | $ | 159,071 | $ | 50,354 | $ | 8,965 | $ | — | $ | 574 | $ | 219,140 | $ | 1,479 | $ | 9,331 | |||||||||||||||||||||||||||||||||||||||||||
Dividends - common ($0.30 per share) | — | — | — | (5,331) | — | — | — | (5,331) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends - Series B ($8.75 per share) | — | — | — | (129) | — | — | — | (129) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends - Series B-2 ($40 per share) | — | — | — | (372) | — | — | (372) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation | 145,737 | 2 | 1,789 | — | — | — | — | 1,791 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of common stock | (36,692) | — | (606) | — | — | — | — | (606) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquired noncontrolling interest | — | — | — | — | — | — | 14,410 | 14,410 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | (5,943) | — | — | 477 | (5,466) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (1,710) | — | (39) | (1,749) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | 15,921 | (15,921) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | (1,411) | 1,411 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at October 31, 2019 | 17,756,180 | 178 | 160,254 | 53,089 | (7,255) | — | 15,422 | 221,688 | 1,479 | 9,331 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends - common ($0.30 per share) | — | — | — | (5,356) | — | — | — | (5,356) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends - Series B ($8.75 per share) | — | — | — | (129) | — | — | — | (129) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends - Series B-2 ($40 per share) | — | — | — | (372) | — | — | — | (372) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation | 112,841 | 1 | 2,043 | — | — | — | — | 2,044 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of common stock | (11,314) | — | (213) | — | — | — | — | (213) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest adjustment | — | — | — | — | — | — | (145) | (145) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury shares | (250,977) | — | — | — | — | (3,493) | — | (3,493) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (16,435) | — | — | (1,506) | (17,941) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (293) | — | (30) | (323) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at October 31, 2020 | 17,606,730 | 179 | 162,084 | 30,797 | (7,548) | (3,493) | 13,741 | 195,760 | 1,479 | 9,331 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation | 125,663 | 1 | 2,581 | — | — | — | — | 2,582 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of common stock | (46,993) | (1) | (700) | — | — | — | — | (701) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest adjustment | — | — | — | — | — | — | (1,331) | (1,331) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (3,441) | — | — | (456) | (3,897) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax | — | — | — | — | 1,815 | — | 11 | 1,826 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at October 31, 2021 | 17,685,400 | $ | 179 | $ | 163,965 | $ | 21,552 | $ | (5,733) | $ | (3,493) | $ | 11,965 | $ | 188,435 | $ | 1,479 | $ | 9,331 | |||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
49
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended October 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Operating activities | ||||||||||||||||||||
| Net loss | $ | (3,897) | $ | (17,941) | $ | (5,466) | ||||||||||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation and amortization | 9,812 | 10,097 | 8,633 | |||||||||||||||||
| Loss (gain) on disposal of assets | 109 | 502 | (1,069) | |||||||||||||||||
| Stock compensation expense | 2,582 | 2,044 | 1,791 | |||||||||||||||||
| Non-cash lease expense | 520 | 470 | — | |||||||||||||||||
| Equity in earnings of investments, net | (3,203) | (339) | (3,073) | |||||||||||||||||
| Cash distributions from equity investments | 219 | — | 351 | |||||||||||||||||
| Deferred income taxes | (189) | (2,133) | (773) | |||||||||||||||||
| Loss on stock in Calavo Growers, Inc. | — | 6,299 | 2,117 | |||||||||||||||||
| Other, net | 335 | 671 | (393) | |||||||||||||||||
| Changes in operating assets and liabilities, net of business combinations: | ||||||||||||||||||||
| Account receivable and receivables/other from related parties | (5,076) | (309) | (4,012) | |||||||||||||||||
| Cultural costs | (639) | 359 | 1,447 | |||||||||||||||||
| Prepaid expenses and other current assets | (1,021) | (44) | (2,548) | |||||||||||||||||
| Income taxes receivable | 5,911 | (4,932) | (601) | |||||||||||||||||
| Other assets | (5) | 411 | (7) | |||||||||||||||||
| Accounts payable and growers and suppliers payable | 5,389 | (5,545) | 3,392 | |||||||||||||||||
| Accrued liabilities and payables to related parties | (730) | (685) | 1,459 | |||||||||||||||||
| Other long-term liabilities | (512) | (242) | 117 | |||||||||||||||||
| Net cash provided by (used in) operating activities | 9,605 | (11,317) | 1,365 | |||||||||||||||||
| Investing activities | ||||||||||||||||||||
| Capital expenditures | (9,834) | (10,599) | (15,867) | |||||||||||||||||
Net proceeds from sales of assets | 119 | 6,261 | 3,978 | |||||||||||||||||
| Net proceeds from sales of real estate development assets | — | — | 2,886 | |||||||||||||||||
| Agriculture property acquisition | — | — | (397) | |||||||||||||||||
| Business combination | — | — | (15,000) | |||||||||||||||||
| Net proceeds from sale of stock in Calavo Growers, Inc. | — | 11,048 | 4,785 | |||||||||||||||||
| Loan to Limoneira Lewis Community Builders, LLC | — | (1,800) | — | |||||||||||||||||
| Collection on loan and note receivable | 25 | 1,800 | 150 | |||||||||||||||||
| Equity investment contributions | — | (2,800) | (4,000) | |||||||||||||||||
| Cash distribution from equity investment | 106 | — | 283 | |||||||||||||||||
| Investments in mutual water companies and water rights | (653) | (64) | (472) | |||||||||||||||||
| Net cash (used in) provided by investing activities | $ | (10,237) | $ | 3,846 | $ | (23,654) | ||||||||||||||
50
LIMONEIRA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
| Years Ended October 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Financing activities | ||||||||||||||||||||
| Borrowings of long-term debt | $ | 102,196 | $ | 121,056 | $ | 122,899 | ||||||||||||||
| Repayments of long-term debt | (95,140) | (104,066) | (93,994) | |||||||||||||||||
| Principal paid on finance lease | (18) | — | — | |||||||||||||||||
| Dividends paid - common | (5,303) | (5,356) | (5,331) | |||||||||||||||||
| Dividends paid - preferred | (501) | (501) | (501) | |||||||||||||||||
| Exchange of common stock | (700) | (213) | (605) | |||||||||||||||||
| Purchase of treasury stock | — | (3,493) | — | |||||||||||||||||
| Payments of deferred financing costs | — | (66) | (35) | |||||||||||||||||
| Net cash provided by financing activities | 534 | 7,361 | 22,433 | |||||||||||||||||
| Effect of exchange rate changes on cash | 36 | (5) | (137) | |||||||||||||||||
| Net (decrease) increase in cash | (62) | (115) | 7 | |||||||||||||||||
| Cash at beginning of year | 501 | 616 | 609 | |||||||||||||||||
| Cash at end of year | $ | 439 | $ | 501 | $ | 616 | ||||||||||||||
| Supplemental disclosures of cash flow information | ||||||||||||||||||||
| Cash paid during the year for interest, net of amounts capitalized | $ | 1,503 | $ | 1,865 | $ | 2,532 | ||||||||||||||
| Cash (received) paid during the year for income taxes, net | $ | (5,911) | $ | (1,235) | $ | 130 | ||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||||||
| Decrease in real estate development and sale-leaseback deferral | $ | — | $ | — | $ | (58,330) | ||||||||||||||
| Non-cash reduction of note receivable | $ | — | $ | — | $ | 89 | ||||||||||||||
| Capital expenditures accrued but not paid at year-end | $ | 657 | $ | 4,269 | $ | 1,333 | ||||||||||||||
In December 2018, the Company terminated its lease agreement with LLCB (as defined herein) that is developing the East Area I real estate development project. As a result, the Company reduced its sale lease-back deferral and corresponding real estate development by $58,330,000 and reclassified $33,353,000 of the Company’s basis in the joint venture from real estate development to equity in investments as further described in Note 7 - Real Estate Development and Note 8 - Equity in Investments of the notes to consolidated financial statements included in this Annual Report.
See Notes to Consolidated Financial Statements.
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 lemons. The Company is also engaged in residential rentals and other rental operations and real estate development activities.
The Company markets and sells lemons directly to food service, wholesale and retail customers throughout the United States, Canada, Asia, Europe and other international markets. The Company is a member of Sunkist Growers, Inc. (“Sunkist”), an agricultural marketing cooperative, and sells its oranges, specialty citrus and other crops to Sunkist-licensed and other third-party packinghouses.
The Company sells the majority of its avocado production to Calavo Growers, Inc. (“Calavo”), a packing and marketing company listed on the NASDAQ Global Select Market under the symbol CVGW. Calavo’s customers include many of the largest retail and food service companies in the United States and Canada. Calavo packs the Company's avocados, which are then sold and distributed under Calavo brands to its customers.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the accounts of all the subsidiaries and investments in which the Company holds a controlling interest. The consolidated financial statements represent the consolidated balance sheets, statements of operations, statements of comprehensive loss, statements of stockholders’ equity and temporary equity and statements of cash flows of Limoneira Company and consolidated subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The Company considers the criteria established under the Financial Accounting Standards Board (“FASB”) – Accounting Standards Code (“ASC”) 810, Consolidations, and the effect of variable interest entities, in its consolidation process.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
The Company grants credit in the course of its operations to cooperatives, companies and lessees of the Company’s facilities. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company provides allowances on its receivables as required based on accounts receivable aging and other factors. At October 31, 2021 and 2020 the allowances totaled $444,000 and $812,000, respectively. For fiscal years 2021, 2020 and 2019, credit losses were insignificant.
Concentrations and Geographic Information
The Company sells the majority of its avocado production to Calavo. Sales of avocados to Calavo were $6,594,000, $8,806,000 and $3,080,000 in fiscal years 2021, 2020 and 2019, respectively. The Company sells the majority of its oranges and specialty citrus to a third-party packinghouse.
Concentrations of credit risk with respect to revenues and trade receivable are limited due to a large, diverse customer base. Two customers each represented 10% of revenue for the year ended October 31, 2021 and one customer represented 10% of revenue for the year ended October 31, 2020. No individual customer represented more than 10% of accounts receivable, net as of October 31, 2021 and one customer represented more than 10% of accounts receivable, net as of October 31, 2020.
Lemons procured from third-party growers were approximately 52%, 60% and 60% of the Company's lemon supply in fiscal years 2021, 2020 and 2019, respectively. One third-party grower was 46% and 39% of grower payable at October 31, 2021 and 2020, respectively.
The Company maintains its cash in federally insured financial institutions. The account balances at these institutions periodically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of risk related to amounts on deposit in excess of FDIC insurance coverage.
52
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Concentrations and Geographic Information (continued)
During fiscal years 2021, 2020 and 2019, the Company had approximately $2,976,000, $3,521,000 and $3,204,000, respectively, of total sales in Chile by Fruticola Pan de Azucar S.A. (“PDA”) and Agricola San Pablo SpA. ("San Pablo").
During fiscal years 2021, 2020 and 2019, the Company had approximately $3,633,000, $14,150,000 and $14,651,000, respectively, of total sales in Argentina by Trapani Fresh.
The majority of the Company's avocados, oranges and specialty citrus and other crops are sold to packinghouses and processors located in the United States. Most of its long-lived assets are located within the United States. Long-lived assets, net of accumulated depreciation, located in Chile were $14,322,000 and $15,261,000 as of October 31, 2021 and 2020, respectively, and located in Argentina were $19,700,000 and $18,576,000 as of October 31, 2021 and 2020, respectively.
Cultural Costs
Growing costs, also referred to as cultural costs, consist of orchard maintenance costs such as cultivation, fertilization and soil amendments, pest control, pruning and irrigation. Harvest costs are comprised of labor and equipment expenses incurred to harvest and deliver crops to the packinghouses.
Certain of the Company's crops have distinct growing periods and distinct harvest and selling periods, each of which lasts approximately four to eight months. During the growing period, cultural costs are capitalized as they are associated with benefiting and preparing the crops for the harvest and selling period. During the harvest and selling period, harvest costs and cultural costs are expensed when incurred and capitalized cultural costs are amortized as components of agribusiness costs and expenses.
Due to climate, growing conditions and the types of crops grown, certain of the Company's other crops may be harvested and sold on a year-round basis. Accordingly, the Company does not capitalize cultural costs associated with these crops and therefore such costs, as well as harvest costs associated with these crops, are expensed to operations when incurred as components of agribusiness costs and expenses.
Most cultural costs, including amortization of capitalized cultural costs, and harvest costs are associated with and charged to specific crops. Certain other costs, such as property taxes, indirect labor, including farm supervision and management, and irrigation that benefit multiple crops are allocated to crops on a per acre basis.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Property, Plant and Equipment
Property, plant and equipment is stated at original cost, net of accumulated depreciation. Depreciation is computed using the straight-line method at rates based upon the estimated useful lives of the related assets as follows (in years):
| Land improvements | 10 – 30 | ||||
| Buildings and building improvements | 10 – 50 | ||||
| Equipment | 5 – 20 | ||||
| Orchards and vineyards | 20 – 40 | ||||
53
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment (continued)
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 and real estate development assets in the Company’s consolidated balance sheets.
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 $1,192,000 and $4,034,000 in fiscal years 2021 and 2020, 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 and the Company’s equity in net earnings or loss of the respective joint venture.
Equity Securities
The Company’s equity securities, are stated at fair value with unrealized gains (losses) reported in net income. The Company had no equity securities as of October 31, 2021 and 2020.
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 to ten 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
There is uncertainty around the breadth and duration of the Company's business disruptions related to the COVID-19 pandemic. The decline in demand for the Company's products beginning the second quarter of fiscal year 2020, which it believes was due to the COVID-19 pandemic, negatively impacted its sales and profitability for the last three quarters of fiscal year 2020 and all of fiscal year 2021. The Company also expects COVID-19 to have some impact to its 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. The full impact of the COVID-19 pandemic on the Company's results of operations, financial condition, or liquidity, including its ability to comply with debt covenants, for fiscal year 2022 and beyond, is driven by estimates that contain uncertainties.
54
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
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, note 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, 2021 and 2020.
Business Combination and Asset Acquisition
Business combinations are accounted for under the acquisition method in accordance with ASC 805, Business Combinations. The acquisition method requires identifiable assets acquired and liabilities assumed and any noncontrolling interest in the business acquired be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Acquisitions that do not meet the definition of a business are accounted for as asset acquisitions. An asset acquisition is accounted for by allocating the cost of the acquisition to the individual assets acquired and liabilities assumed on a relative fair value basis. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative fair value basis. Transaction costs are expensed in a business combination and are considered a component of the cost of the acquisition in an asset acquisition.
Comprehensive Loss
Comprehensive loss represents all changes in a company’s net assets, except changes resulting from transactions with stockholders. Other comprehensive income or loss primarily includes foreign currency translation items, defined benefit pension items and unrealized gains or losses on available-for-sale securities. Accumulated other comprehensive income (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 (in thousands):
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-tax Amount | Tax (Expense) Benefit | Net Amount | Pre-tax Amount | Tax (Expense) Benefit | Net Amount | Pre-tax Amount | Tax (Expense) Benefit | Net Amount | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ | (685) | $ | — | $ | (685) | $ | (707) | $ | — | $ | (707) | $ | (1,103) | $ | — | $ | (1,103) | |||||||||||||||||||||||||||||||||||
| Minimum pension liability adjustments: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) before reclassifications | 3,440 | (940) | 2,500 | 205 | 69 | 274 | (859) | 252 | (607) | ||||||||||||||||||||||||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amounts reclassified to earnings included in "Selling, general and administrative" | — | — | — | — | 140 | 140 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | $ | 2,755 | $ | (940) | $ | 1,815 | $ | (502) | $ | 209 | $ | (293) | $ | (1,962) | $ | 252 | $ | (1,710) | |||||||||||||||||||||||||||||||||||
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component (in thousands):
| Foreign Currency Translation Loss | Defined Benefit Pension Plan | Available-for-Sale Securities | Other | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||
Balance as of October 31, 2018 | $ | (1,257) | $ | (3,238) | $ | 13,435 | $ | 25 | $ | 8,965 | |||||||||||||||||||
| Adoption of ASU 2016-01 | — | — | (15,921) | — | (15,921) | ||||||||||||||||||||||||
| Adoption of ASU 2018-02 | (2) | (908) | 2,346 | (25) | 1,411 | ||||||||||||||||||||||||
Balance as of November 1, 2018 | (1,259) | (4,146) | (140) | — | (5,545) | ||||||||||||||||||||||||
| Other comprehensive loss | (1,103) | (607) | — | — | (1,710) | ||||||||||||||||||||||||
Balance as of October 31, 2019 | (2,362) | (4,753) | (140) | — | (7,255) | ||||||||||||||||||||||||
| Other comprehensive (loss) income | (707) | 274 | 140 | — | (293) | ||||||||||||||||||||||||
Balance as of October 31, 2020 | (3,069) | (4,479) | — | — | (7,548) | ||||||||||||||||||||||||
| Other comprehensive (loss) income | (685) | 2,500 | — | — | 1,815 | ||||||||||||||||||||||||
Balance as of October 31, 2021 | $ | (3,754) | $ | (1,979) | $ | — | $ | — | $ | (5,733) | |||||||||||||||||||
Foreign Currency
San Pablo and PDA’s functional currency is 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 income (loss).
Aggregate foreign exchange transaction losses realized for the Company's foreign subsidiaries was approximately $646,000 for fiscal year 2021 and are included in selling, general and administrative expenses in the consolidated statements of operations.
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.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
The Company’s avocados, oranges, specialty citrus and other specialty crops are packed and sold by Calavo and other 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. The Company recorded agribusiness revenues from crop insurance proceeds of $2,311,000 in fiscal year 2019. No proceeds were received in fiscal years 2021 and 2020.
Advertising Expense
Advertising costs are expensed as incurred. Advertising costs were $178,000 and $239,000 in fiscal years 2021 and 2020, respectively, and were not material in fiscal year 2019.
Leases
Accounting for Leases as a Lessee - In its ordinary course of business, the Company enters into leases as a lessee generally for agricultural land and packinghouse 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.
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 has 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 Loss per Share
Basic net 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 preferred stock. Diluted net 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. The Series B and Series B-2 convertible preferred shares were anti-dilutive for fiscal years ended October 31, 2021, 2020 and 2019.
Diluted net 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 using the treasury stock method. The Company’s unvested, restricted stock awards qualify as participating shares.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Defined Benefit Retirement Plan
The Company sponsors a defined benefit retirement plan that was frozen in June 2004, and no future benefits have been accrued to participants subsequent to that time. Ongoing accounting for this plan under FASB ASC 715, Compensation – Retirement Benefits, provides guidance as to, among other things, future estimated pension expense, pension liability and minimum funding requirements. This information is provided to the Company by third-party actuarial consultants. In developing this data, certain estimates and assumptions are used, including among other things, discount rate, long-term rate of return and mortality tables.
In fiscal year 2021, the Company decided to terminate the Plan effective December 31, 2021. The liabilities disclosed as of October 31, 2021, reflect an estimate of the additional cost to pay lump sums to a portion of the active and vested terminated participants and purchase annuities for all remaining participants from an insurance company.
During 2021, the Society of Actuaries (SOA) released a new mortality improvement scale table, referred to as MP-2021, which is believed to better reflect mortality improvements and is to be used in calculating defined benefit pension obligations. In addition, during fiscal year 2021, the assumed discount rate to measure the pension obligation decreased to 2.6%. The Company used the latest mortality tables released by the SOA through October 2021 to measure its pension obligation as of October 31, 2021 and combined with the assumed discount rate and other demographic assumptions, its pension liability decreased by approximately $2,699,000 as of October 31, 2021. Further changes in any of these estimates could materially affect the amounts recorded that are related to the Company's defined benefit retirement plan.
Recent Accounting Pronouncements
FASB ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and related ASUs
This amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.
ASU 2016-13 is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this ASU effective November 1, 2020 and the adoption did not have a material impact on its consolidated financial statements.
FASB ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
This amendment simplifies accounting for convertible instruments by removing major separation models currently required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas.
ASU 2020-06 is effective for public business entities that meet the definition of a SEC filer for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020. The Company is evaluating the effect this ASU may have on its consolidated financial statements.
3. Acquisitions
Agriculture Property Acquisition
In January 2019, the Company purchased land for use as a citrus orchard for a cash purchase price of $397,000. The acquisition was for 26 acres of agricultural property adjacent to the Company’s orchards in Lindsay, California. This agriculture property acquisition is included in property, plant and equipment on the Company’s consolidated balance sheet.
58
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Acquisitions (continued)
Trapani Fresh Business Combination
On May 30, 2019, the Company acquired a 51% interest in a joint venture, Trapani Fresh, formed with FGF Trapani ("FGF"), a multi-generational, family owned citrus operation in Argentina. To consummate the transaction, the Company formed a subsidiary under the name Limoneira Argentina S.A.U. (“Limoneira Argentina”) as the managing partner and acquired a 51% interest in an Argentine Trust that held a 75% interest in Finca Santa Clara (“Santa Clara”), a ranch with approximately 1,200 acres of planted lemons. Trapani Fresh controls the trust and grows fresh citrus.
Total consideration paid for the Company’s interest in Trapani Fresh was $15,000,000 and transaction costs of approximately $654,000 were included in selling, general and administrative expense during fiscal year 2019. The Company consolidated Trapani Fresh and accounted for the acquisition of Trapani Fresh as a business combination, resulting in FGF’s 49% interest in Trapani Fresh being accounted for as a noncontrolling interest.
In February 2020, FGF agreed to a decrease in the purchase consideration of $152,000 to reflect profits that Limoneira Argentina would have received had the transaction been consummated at the beginning of the 2019 lemon export season. The Company recorded a receivable from FGF, a decrease in noncontrolling interest and a decrease in goodwill.
Below is a summary of the fair value of the net assets acquired on the acquisition date based on a third-party valuation which was updated during the second quarter of fiscal year 2020 (in thousands):
| Cultural costs | $ | 3,270 | |||
| Land and land improvements | 9,520 | ||||
| Buildings and building improvements | 870 | ||||
| Orchards | 8,410 | ||||
Customer relationships, trademarks and non-competition agreement (10 year useful life) | 6,920 | ||||
| Goodwill | 123 | ||||
| Total assets acquired | 29,113 | ||||
| Noncontrolling interest | (14,265) | ||||
| Net cash paid | $ | 14,848 | |||
Goodwill of $123,000 relates to synergies of the operations, was allocated to the fresh lemons segment and was not deductible for tax purposes. Revenue of $14,651,000 and net income of $999,000 of Trapani Fresh were included in the Company’s consolidated statement of operations from the acquisition date to the period ended October 31, 2019. The unaudited, pro forma consolidated statement of operations as if Trapani Fresh had been included in the consolidated results of the Company for the year ended October 31, 2019 would have resulted in revenues of $177,625,000 and net loss of $6,092,000.
In June 2021, the Company entered into an agreement, effective March 1, 2021, to sell and license certain assets of Trapani Fresh to FGF. These assets consist of packing supplies and certain intangible assets related to the packing, marketing, and selling business of Trapani Fresh. The total consideration to be received is approximately $3,900,000 over an 8-year term in 16 equal installments. Payments to be received are secured by FGF’s interest in land parcels at the Santa Clara ranch and consist of a $1,200,000 note receivable and $2,700,000 of royalty payments. There was no material gain or loss recognized on the transaction. In August 2021, the Company entered into several additional agreements whereby the additional 25% interest in Santa Clara was transferred into the trust resulting in the trust now holding a 100% interest in Santa Clara. Trapani Fresh owns and operates the 1,200-acre Santa Clara ranch and now sells the lemons it grows to FGF, who packs, markets, and sells the fruit to its export customers. As a result of this transaction, Trapani Fresh now recognizes lemon revenues at the market price less packinghouse charges to harvest, pack and market the fruit.
4. Fair Value Measurements
Under the FASB ASC 820, Fair Value Measurements and Disclosures, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Fair Value Measurements (continued)
At October 31, 2019, the Company owned equity securities consisting of marketable securities in Calavo common stock of 200,000 shares representing approximately 1.1% of Calavo’s outstanding common stock at a stock price of $86.73 per share. These securities were measured at fair value by quoted market prices and changes in fair value were included in the statement of operations. In fiscal year 2020, the Company sold all 200,000 shares of Calavo common stock for a total of $11,048,000, recognizing a loss of $6,299,000. In fiscal year 2019, the Company sold 50,000 shares of Calavo common stock for a total of $4,785,000, recognizing a loss of $2,117,000.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at October 31 (in thousands):
| 2021 | 2020 | ||||||||||
| Prepaid supplies and insurance | $ | 2,521 | $ | 2,080 | |||||||
| Note receivable and related interest | 2,438 | 2,490 | |||||||||
| Real estate development held for sale | 2,543 | 2,543 | |||||||||
| Sales tax receivable | 909 | 1,867 | |||||||||
| Lemon supplier advances and other | 2,298 | 1,708 | |||||||||
| $ | 10,709 | $ | 10,688 | ||||||||
6. Property, Plant and Equipment
Property, plant and equipment consists of the following at October 31 (in thousands):
| 2021 | 2020 | ||||||||||
| Land | $ | 95,868 | $ | 96,334 | |||||||
| Land improvements | 35,440 | 33,733 | |||||||||
| Buildings and building improvements | 48,565 | 48,441 | |||||||||
| Equipment | 62,598 | 60,124 | |||||||||
| Orchards | 63,454 | 61,098 | |||||||||
| Construction in progress | 22,477 | 20,469 | |||||||||
| 328,402 | 320,199 | ||||||||||
| Less accumulated depreciation | (85,982) | (77,550) | |||||||||
| $ | 242,420 | $ | 242,649 | ||||||||
Depreciation expense was $8,883,000, $9,098,000 and $7,944,000 for fiscal years 2021, 2020 and 2019, respectively.
In August 2020, the Company sold property located in Lindsay, California. The Company received net proceeds of $6,011,000 after transaction and other costs, and recorded a loss of approximately $424,000, which is included in loss (gain) on disposal of assets in the consolidated statements of operations.
In September 2019, the Company sold its multi-use Mercantile property consisting of a retail convenience store, gas station, car wash and quick serve restaurant located in Santa Paula, California. The Company received net proceeds of $4,000,000 and recognized a gain of approximately $586,000, which is included in loss (gain) on disposal of assets in the consolidated statement of operations.
7. Real Estate Development
Real estate development assets are comprised primarily of land and land development costs and consist of the following at October 31 (in thousands):
| 2021 | 2020 | ||||||||||
| East Area I - Retained property | $ | 13,335 | $ | 13,169 | |||||||
| East Area II | 9,493 | 8,467 | |||||||||
| $ | 22,828 | $ | 21,636 | ||||||||
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Real Estate Development (continued)
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 in LLCB to Lewis for $20,000,000.
The Company and the joint venture also entered into a Retained Property Development Agreement on the Transaction Date (the "Retained Property Agreement"). Under the terms of the Retained Property Agreement, the joint venture will transfer certain contributed East Area I property, which is entitled for commercial development, back to 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 Retained Property and East Area II includes estimated costs incurred by and reimbursable to LLCB of $5,771,000 and $5,300,000 at October 31, 2021 and 2020, respectively, which is included in payables to related parties.
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. The Loan, as modified and extended, matures February 22, 2023. The interest rate on the Loan is LIBOR 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 joint venture had an outstanding balance of zero as of October 31, 2021. The Loan has a one year extension option through February 22, 2024 subject to terms and conditions as defined in the agreement, with the maximum borrowing amount reduced to $35,000,000 during the extension period.
In February 2018, certain principals from Lewis and by the Company guaranteed the obligations under the Loan. The guarantee shall continue in effect until all of the Loan obligations are fully paid and the guarantors are jointly and severally liable for all Loan obligations in the event of default by LLCB. 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. The extension had no impact on the Company's guarantee value. 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 the joint venture.
In February 2020, the Company and Lewis each loaned $1,800,000 to LLCB at an interest rate of 4.6%, which was repaid in June 2020.
Through October 31, 2021, the joint venture has closed sales of the initial residential lots representing 586 residential units.
Other Real Estate Development Projects
The remaining real estate development parcel within the Templeton Santa Barbara, LLC project is described as Sevilla. In fiscal year 2020, the Company entered into an agreement to sell its Sevilla property for $2,700,000, which is expected to close in the second quarter of fiscal year 2022. After transaction and other costs, the Company expects to receive cash proceeds of approximately $2,550,000 and recognize an immaterial gain upon closing. At October 31, 2021 and 2020, the $2,543,000 carrying value of the property was classified as held for sale and included in prepaid expenses and other current assets.
During 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. The promissory note was originally scheduled to mature in December 2019 but has been periodically extended with principal payments totaling $400,000 received through October 31, 2021. In November 2021, the promissory note was further extended to June 30, 2022 upon making a principal paydown of $250,000, which was paid in November 2021, and revising the interest rate to 4.00% per annum, with an option to further extend the maturity date of the promissory note to September 30, 2022 upon making an additional principal paydown of $250,000. At October 31, 2021, the net carrying value of the note was $2,600,000 and classified in prepaid expenses and other current assets.
61
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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 $200,000, $210,000 and $159,000 in fiscal years 2021, 2020 and 2019, respectively. Del Mar markets lemons through the Company pursuant to its customary marketing agreements and the amount of lemons procured from Del Mar was $1,681,000, $1,037,000 and $1,674,000 in fiscal years 2021, 2020 and 2019, respectively. Fruit proceeds due to Del Mar were $694,000 and $334,000 at October 31, 2021 and 2020, respectively, and are included in grower’s payable in the accompanying consolidated balance sheets.
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 2014 and an additional 12% interest was acquired with the purchase of PDA in fiscal 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 (losses) of investments. Amortization amounted to $180,000, $180,000 and $298,000 for fiscal years 2021, 2020 and 2019, respectively, and is estimated to be approximately $118,000 $87,000 and $76,000 per year for years ending October 31, 2022 through October 31, 2024, respectively, and immaterial thereafter.
The Company recognized $3,405,000, $3,975,000 and $3,741,000 of lemon sales to Rosales in fiscal years 2021, 2020 and 2019, respectively. In fiscal years 2021, 2020 and 2019, the aggregate amount of lemons and oranges procured from Rosales was $5,304,000, $3,190,000 and $4,315,000, respectively. Amounts due from (to) Rosales were $1,570,000 and $(954,000) at October 31, 2021 and 2020, respectively, and are included in receivables/other from related parties and payables to related parties, respectively.
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LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Equity in Investments (continued)
Limoneira Lewis Community Builders, LLC (“LLCB”)
As described in Note 7 – 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, 2021 and 2019 but was not deemed significant for the year ended October 31, 2020. Therefore, the audited financial statements of LLCB for the years ended October 31, 2021, 2020 and 2019 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 $51,416,000 as of October 31, 2021. The basis difference of $8,801,000 at October 31, 2021 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 in fiscal years 2021, 2020 and 2019 totaled $1,434,000, $1,060,000 and $1,498,000, respectively. The Company's share of LLCB's net income for fiscal years 2021, 2020 and 2019 prior to basis amortization was $4,508,000, $1,386,000 and $4,368,000, respectively.
The following is financial information of the equity method investees for fiscal years 2021, 2020 and 2019 (in thousands):
| 2021 | Del Mar | Romney | Rosales | LLCB | |||||||||||||||||||
| Current assets | $ | 492 | $ | — | $ | 3,544 | $ | 108,964 | |||||||||||||||
| Non-current assets | $ | 865 | $ | 617 | $ | 2,406 | $ | — | |||||||||||||||
| Current liabilities | $ | — | $ | — | $ | 2,362 | $ | 4,708 | |||||||||||||||
| Non-current liabilities | $ | — | $ | — | $ | 2,083 | $ | — | |||||||||||||||
| Revenues | $ | 2,059 | $ | 17 | $ | 9,862 | $ | 42,853 | |||||||||||||||
| Operating income (loss) | $ | 1,052 | $ | (4) | $ | 438 | $ | 9,087 | |||||||||||||||
| Net income (loss) | $ | 1,052 | $ | (4) | $ | 35 | $ | 9,087 | |||||||||||||||
| 2020 | |||||||||||||||||||||||
| Current assets | $ | 270 | $ | — | $ | 4,564 | $ | 130,171 | |||||||||||||||
| Non-current assets | $ | 817 | $ | 670 | $ | 2,218 | $ | — | |||||||||||||||
| Current liabilities | $ | — | $ | — | $ | 3,540 | $ | 35,002 | |||||||||||||||
| Non-current liabilities | $ | — | $ | — | $ | 1,449 | $ | — | |||||||||||||||
| Revenues | $ | 930 | $ | 20 | $ | 10,097 | $ | 25,906 | |||||||||||||||
| Operating (loss) income | $ | (109) | $ | (2) | $ | 1,216 | $ | 2,615 | |||||||||||||||
| Net (loss) income | $ | (109) | $ | (2) | $ | 476 | $ | 2,615 | |||||||||||||||
| 2019 | |||||||||||||||||||||||
| Revenues | $ | 2,290 | $ | 15 | $ | 8,898 | $ | 37,788 | |||||||||||||||
| Operating income (loss) | $ | 1,299 | $ | (5) | $ | 403 | $ | 10,001 | |||||||||||||||
| Net income (loss) | $ | 1,299 | $ | (5) | $ | 288 | $ | 10,001 | |||||||||||||||
63
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Equity in Investments (continued)
The Company’s investment and equity in earnings (losses) of the equity method investees are as follows (in thousands):
| Del Mar | Romney | Rosales | LLCB | Total | |||||||||||||||||||||||||
| Investment balance October 31, 2018 | $ | 1,935 | $ | 512 | $ | 2,191 | $ | 14,060 | $ | 18,698 | |||||||||||||||||||
| Equity earnings (losses) | 366 | — | (163) | 2,870 | 3,073 | ||||||||||||||||||||||||
| Cash distributions | (351) | — | (283) | — | (634) | ||||||||||||||||||||||||
| Investment contributions | — | — | — | 4,000 | 4,000 | ||||||||||||||||||||||||
| Capitalized interest adjustment | — | — | — | (267) | (267) | ||||||||||||||||||||||||
| Reclassification of sale and leaseback deferral | — | — | — | 33,353 | 33,353 | ||||||||||||||||||||||||
| Investment balance October 31, 2019 | 1,950 | 512 | 1,745 | 54,016 | 58,223 | ||||||||||||||||||||||||
| Equity earnings (losses) | (30) | (1) | 44 | 326 | 339 | ||||||||||||||||||||||||
| Investment contributions | — | — | — | 2,800 | 2,800 | ||||||||||||||||||||||||
| Foreign currency adjustments | — | — | (148) | — | (148) | ||||||||||||||||||||||||
| Investment balance October 31, 2020 | 1,920 | 511 | 1,641 | 57,142 | 61,214 | ||||||||||||||||||||||||
| Equity earnings (losses) | 296 | (3) | (164) | 3,074 | 3,203 | ||||||||||||||||||||||||
| Cash distributions | (219) | — | (106) | — | (325) | ||||||||||||||||||||||||
| Foreign currency adjustments | — | — | (20) | — | (20) | ||||||||||||||||||||||||
| Investment balance October 31, 2021 | $ | 1,997 | $ | 508 | $ | 1,351 | $ | 60,216 | $ | 64,072 | |||||||||||||||||||
9. Goodwill and Intangible Assets, Net
A summary of the change in the carrying amount of goodwill is as follows (in thousands):
| Goodwill Carrying Amount | |||||
| Balance at October 31, 2019 | $ | 1,839 | |||
| Trapani Fresh purchase price adjustment | (297) | ||||
| Foreign currency translation adjustment | (7) | ||||
| Balance at October 31, 2020 | 1,535 | ||||
| Foreign currency translation adjustment | (8) | ||||
| Balance at October 31, 2021 | $ | 1,527 | |||
See Note 3 - Acquisitions for additional information regarding the Trapani Fresh purchase price adjustment.
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, 2021 with no impairment noted. The Company did not incur any goodwill impairment losses in fiscal years 2021, 2020 or 2019, as the estimated fair values of its reporting units were in excess of their carrying values.
As of October 31, 2021, the Company has allocated goodwill to its reportable segments as follows: Fresh Lemons $957,000 and Lemon Packing $570,000.
During the fiscal year ended October 31, 2021, the Company acquired additional water rights in Chile for $186,000.
64
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Goodwill and Intangible Assets, Net (continued)
Intangible assets consisted of the following as of October 31, 2021 and 2020 (in thousands):
| October 31, 2021 | October 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life in Years | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life in Years | ||||||||||||||||||||||||||||||||||||||||
| Intangible assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Trade names and trademarks | $ | 2,108 | $ | (663) | $ | 1,445 | 8 | $ | 3,771 | $ | (947) | $ | 2,824 | 10 | |||||||||||||||||||||||||||||||||
| Customer relationships | 4,037 | (1,209) | 2,828 | 9 | 5,010 | (989) | 4,021 | 9 | |||||||||||||||||||||||||||||||||||||||
| Non-competition agreement | 437 | (22) | 415 | 8 | 1,040 | (147) | 893 | 10 | |||||||||||||||||||||||||||||||||||||||
| Acquired water and mineral rights | 3,641 | — | 3,641 | Indefinite | $ | 3,571 | $ | — | $ | 3,571 | Indefinite | ||||||||||||||||||||||||||||||||||||
| Intangible assets | $ | 10,223 | $ | (1,894) | $ | 8,329 | $ | 13,392 | $ | (2,083) | $ | 11,309 | |||||||||||||||||||||||||||||||||||
Amortization expense totaled $929,000, $999,000, and $689,000 for the years ended October 31, 2021, 2020 and 2019, respectively.
Estimated future amortization expense of intangible assets for each of the next five fiscal years and thereafter are as follows (in thousands):
| 2022 | $ | 724 | |||
| 2023 | 724 | ||||
| 2024 | 716 | ||||
| 2025 | 711 | ||||
| 2026 | 711 | ||||
| Thereafter | 1,102 | ||||
| $ | 4,688 | ||||
10. Other Assets
Investments in Mutual Water Companies
The Company’s investments in various not-for-profit mutual water companies provide the Company 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. Amounts included in other assets in the consolidated balance sheets as of October 31, 2021 and 2020 were $5,994,000 and $5,563,000, respectively.
11. Accrued Liabilities
Accrued liabilities consist of the following at October 31 (in thousands):
| 2021 | 2020 | ||||||||||
| Compensation | $ | 2,112 | $ | 2,275 | |||||||
| Property taxes | 676 | 683 | |||||||||
| Lemon and orange supplier payables | — | 1,346 | |||||||||
| Operating expenses | 1,203 | 938 | |||||||||
| Leases | 604 | 959 | |||||||||
| Other | 1,947 | 1,746 | |||||||||
| $ | 6,542 | $ | 7,947 | ||||||||
65
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Long-Term Debt
Long-term debt is comprised of the following at October 31 (in thousands):
| 2021 | 2020 | ||||||||||
Farm Credit West revolving and non-revolving lines of credit: The interest rate of the revolving line of credit is variable based on the one-month London Interbank Offered Rate (“LIBOR”), which was 0.09% at October 31, 2021, plus 1.85%. The interest rate for the $40.0 million outstanding balance of the non-revolving line of credit was fixed at 4.77% through July 1, 2022, 3.57% through July 1, 2025 and variable interest thereafter. Interest is payable monthly and the principal is due in full on July 1, 2026. | $ | 111,293 | $ | 102,251 | |||||||
Farm Credit West term loan: Effective July 1, 2020, the interest rate was fixed at 2.48%. The loan is payable in quarterly installments through November 2022. | 809 | 1,438 | |||||||||
Farm Credit West term loan: Effective July 1, 2020, the interest rate was fixed at 3.24%. The loan is payable in monthly installments through October 2035. | 974 | 1,029 | |||||||||
Farm Credit West term loan: Effective July 1, 2020, the interest rate was fixed at 3.24%. The loan is payable in monthly installments through March 2036. | 8,004 | 8,433 | |||||||||
Farm Credit West term loan: Effective July 1, 2020, the interest rate was fixed at 2.77% until July 1, 2025, becoming variable for the remainder of the loan. The loan is payable in monthly installments though March 2036. | 5,892 | 6,220 | |||||||||
| Wells Fargo term loan: The loan was repaid in August 2021 with proceeds from the Farm Credit West term loan. | — | 3,491 | |||||||||
Farm Credit West term loan: Effective August 2, 2021, the interest rate was fixed at 3.19%. The loan is payable in monthly installments through September 2026. | 2,475 | — | |||||||||
Banco de Chile term loan: The interest rate is fixed at 6.48%. The loan is payable in annual installments through January 2025. | 1,011 | 1,205 | |||||||||
Note Payable: The interest rate ranges from 5.00% to 7.00% and was 6.50% at October 31, 2021. The loan includes interest-only monthly payments and principal is due in February 2023. | 1,435 | 1,435 | |||||||||
Banco de Chile COVID-19 loans: The interest rates are fixed at 3.48%. The loans are payable in monthly installments beginning February 2021 through September 2024. | 411 | 522 | |||||||||
Banco de Chile COVID-19 loans: The interest rates are fixed at 3.48% and 4.26%. The loans are payable in monthly installments beginning September 2021 through September 2026. | 652 | — | |||||||||
| Subtotal | 132,956 | 126,024 | |||||||||
| Less deferred financing costs, net of accumulated amortization | 131 | 176 | |||||||||
| Total long-term debt, net | 132,825 | 125,848 | |||||||||
| Less current portion | 2,472 | 3,277 | |||||||||
| Long-term debt, less current portion | $ | 130,353 | $ | 122,571 | |||||||
In August 2021, the Company entered into an equipment finance agreement (the "FCW term loan") with Farm Credit West, PCA (the “Lender”) and used the proceeds to pay off the Wells Fargo term loan. The FCW term loan has a fixed interest rate of 3.19% and is payable in monthly installments through September 2026. There were no unamortized debt financing costs related to the Wells Fargo term loan and no capitalized financing costs related to the FCW term loan.
In June 2021, the Company entered into a Master Loan Agreement (the “MLA”) with 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 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. The MLA amends and restates the previous Master Loan Agreement between the Company and the Lender, dated June 19, 2017 and extends the principal repayment to July 1, 2026. Debt financing costs related to the MLA agreement were immaterial.
66
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Long-Term Debt (continued)
In June 2020, the Company and Farm Credit West entered into a Conversion Agreement to convert the term loans noted above to fixed interest rate loans effective July 1, 2020. No changes were made to the outstanding principal balances on the term loans and the Company made no cash repayments of principal. The rates were subject to a prepayment restriction period for a portion of the fixed rate term that expired on January 1, 2021. The Company may prepay any amounts without penalty.
In March 2020, the Company entered into a revolving equity line of credit promissory note and loan agreement with Farm Credit West 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 matures in 2043 and features a 3-year draw period followed by 20 years of fully amortized loan payments. The interest rate is variable with monthly interest-only payments during the 3-year draw period and monthly principal and interest payments thereafter.
The Supplements and RELOC provide aggregate borrowing capacity of $130,000,000 comprised of $75,000,000 under the Revolving Credit Supplement, $40,000,000 under the Non-Revolving Credit Supplement and $15,000,000 under the RELOC. As of October 31, 2021, the Company's outstanding borrowings under the revolving and non-revolving lines of credit were $111,293,000 and it had $18,707,000 of availability. For amounts outstanding under both Supplements, interest will begin to be charged on the date the Lender disburses principal and will continue until the outstanding indebtedness under the Supplements is paid in full with interest.
The initial interest rate in effect under the Revolving Credit Supplement was 1.69% per annum, and was automatically adjusted commencing July 1, 2021 and on the first day of each month thereafter. The interest rate for any amount outstanding under the Revolving Credit Supplement will be based on the one-month LIBOR rate plus or minus an applicable margin. The applicable margin will range from 1.75% to 2.35% depending on the ratio of current assets, plus the remaining available commitment divided by current liabilities. On July 1, 2022, and on each one-year anniversary thereafter, the Company has the option to convert the interest rate in use under the Revolving Credit Supplement from the preceding LIBOR-based calculation to a variable interest rate. Any amounts outstanding under the Revolving Credit Supplement will be due and payable in full on July 1, 2026. The Company may prepay any amounts outstanding under the Revolving Credit Supplement without penalty.
The initial interest rate in effect under the Non-Revolving Credit Supplement is a fixed interest rate of 4.77% through July 1, 2022 and then will convert to 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 corresponding interest rate group. Any amount outstanding under the Non-Revolving Credit Supplement is due and payable in full on July 1, 2026. 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 and RELOC, including any indebtedness under the Supplements, is secured by a first lien on Company-owned stock or participation certificates, Company funds maintained with Lender, Lender’s unallocated surplus, and certain of the Company’s agricultural properties in Tulare and Ventura counties in California 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 that provide 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 specified debt service coverage ratio on an annual basis. In December 2021, the Lender modified the covenant to defer measurement at October 31, 2021 and revert to a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2022.
The Company received annual cash patronage dividends from Farm Credit West of $1,170,000, $1,566,000 and $853,000 in fiscal years 2021, 2020 and 2019, respectively.
In August 2021, PDA and San Pablo entered into term loan agreements for an aggregate amount of approximately $652,000. These small business loans are guaranteed by the Chilean government in response to economic instability caused by the COVID-19 pandemic. The unsecured loans mature in August 2025 and September 2026, bear interest at fixed rates of 3.48% and 4.26%, respectively, and are payable in monthly installments beginning September 2021.
67
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Long-Term Debt (continued)
In July and September 2020, PDA and San Pablo entered into term loan agreements for an aggregate amount of approximately $522,000. These small business loans are guaranteed by the Chilean government in response to economic instability caused by the COVID-19 pandemic. The unsecured loans mature in July 2024 and September 2024, bear interest at fixed rates of 3.48% and are payable in monthly installments beginning February 2021 and April 2021, respectively.
Interest is capitalized on non-bearing orchards, real estate development projects and significant construction in progress. The Company capitalized interest of $1,110,000, $921,000 and $1,369,000 during the fiscal years ended 2021, 2020 and 2019, respectively. Capitalized interest is included in property, plant and equipment and real estate development assets in the Company’s consolidated balance sheets.
The Company incurs certain loan fees and costs associated with its new or amended credit arrangements. Such costs are capitalized as deferred financing costs and amortized as interest expense using the straight-line method over the terms of the credit agreements. The balance of deferred financing costs was $131,000 and $176,000, net of amortization at October 31, 2021 and 2020, respectively, and was included in long-term debt on the Company’s consolidated balance sheet.
Principal payments on the Company’s long-term debt are due as follows (in thousands):
| 2022 | $ | 2,472 | |||
| 2023 | 3,385 | ||||
| 2024 | 1,815 | ||||
| 2025 | 2,092 | ||||
| 2026 | 112,749 | ||||
| Thereafter | 10,443 | ||||
| $ | 132,956 | ||||
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 21 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):
| 2021 | 2020 | ||||||||||
| Land | $ | 3,516 | $ | 3,522 | |||||||
| Buildings, equipment and building improvements | 18,712 | 18,516 | |||||||||
| Less: accumulated depreciation | (6,331) | (5,691) | |||||||||
| Property, plant and equipment, net under operating leases | $ | 15,897 | $ | 16,347 | |||||||
Depreciation expense for assets under operating leases was approximately $669,000 and $664,000 for the fiscal years 2021 and 2020, respectively.
The Company’s rental operations revenue consists of the following (in thousands):
| Year ended October 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating lease revenue | $ | 4,329 | $ | 4,287 | |||||||
| Variable lease revenue | 317 | 335 | |||||||||
| Total lease revenue | $ | 4,646 | $ | 4,622 | |||||||
68
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Leases (continued)
Lessor Arrangements (continued)
The future minimum lease payments to be received by the Company related to these operating lease agreements as of October 31, 2021 are as follows (in thousands):
| 2022 | $ | 1,274 | |||
| 2023 | 1,100 | ||||
| 2024 | 822 | ||||
| 2025 | 823 | ||||
| 2026 | 167 | ||||
| Thereafter | 675 | ||||
| Total | $ | 4,861 | |||
The Company’s rental operations revenue included contingent rental revenue of $355,000 for fiscal year 2019.
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 equipment with remaining lease terms ranging from to 16 years, with various term extensions available. The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants. 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.
Operating lease costs were $606,000 and $559,000 and variable lease costs were $288,000 and immaterial, for the fiscal years 2021 and 2020, respectively, which are primarily included in agribusiness costs and expenses in the Company’s consolidated statements of operations. Finance lease costs and short term lease costs were immaterial for both years.
Supplemental balance sheet information related to leases consists of the following as of October 31 (in thousands):
| Classification | 2021 | 2020 | |||||||||||||||
| Assets | |||||||||||||||||
| Operating lease ROU assets | $ | 2,041 | $ | 2,053 | |||||||||||||
| Finance lease assets | 1,142 | — | |||||||||||||||
| $ | 3,183 | $ | 2,053 | ||||||||||||||
| Liabilities | |||||||||||||||||
| Current operating lease liabilities | $ | 488 | $ | 521 | |||||||||||||
| Current finance lease liabilities | 249 | — | |||||||||||||||
| Non-current operating lease liabilities | 1,648 | 1,610 | |||||||||||||||
| Non-current finance lease liabilities | 884 | — | |||||||||||||||
| Total operating lease liabilities | $ | 3,269 | $ | 2,131 | |||||||||||||
| Weighted-average remaining lease term (in years) | |||||||||||||||||
| Operating leases | 10.9 | 11.0 | |||||||||||||||
| Finance leases | 4.9 | — | |||||||||||||||
| Weighted-average discount rate | |||||||||||||||||
| Operating leases | 3.7 | % | 3.8 | % | |||||||||||||
| Finance leases | 3.3 | % | — | ||||||||||||||
69
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 (in thousands):
| Year ended October 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash outflows from operating leases | $ | 603 | $ | 559 | ||||||||||
| Operating cash outflows from finance leases | $ | 3 | $ | — | ||||||||||
| Financing cash outflows from finance leases | $ | 18 | $ | — | ||||||||||
| ROU assets obtained in exchange for new operating lease liabilities | $ | 271 | $ | 108 | ||||||||||
| Leased assets obtained in exchange for new finance lease liabilities | $ | 1,151 | $ | — | ||||||||||
Future minimum lease payments under non-cancellable leases for each of the subsequent five fiscal years and thereafter are as follows (in thousands), which excludes $448,000 of operating lease payments for leases that have been signed but not commenced:
| Operating | Finance | Total | |||||||||||||||
| 2022 | $ | 488 | $ | 249 | $ | 737 | |||||||||||
| 2023 | 312 | 249 | 561 | ||||||||||||||
| 2024 | 281 | 249 | 530 | ||||||||||||||
| 2025 | 210 | 249 | 459 | ||||||||||||||
| 2026 | 134 | 229 | 363 | ||||||||||||||
| Thereafter | 1,192 | — | 1,192 | ||||||||||||||
| Total lease payments | 2,617 | 1,225 | 3,842 | ||||||||||||||
| Less: Imputed interest | (481) | (92) | (573) | ||||||||||||||
| Present value of lease liabilities | $ | 2,136 | $ | 1,133 | $ | 3,269 | |||||||||||
In addition to operating and finance lease commitments, the Company also has a contract for pollination services which does not meet the definition of a lease, with minimum future payments of $307,000 and $51,000 in fiscal years 2022 and 2023, respectively.
Total lease expense for fiscal year 2019 was $733,000, which was included in agribusiness costs and expenses in the Company’s consolidated statements of operations.
14. Earnings Per Share
Basic net 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 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. The Series B and Series B-2 convertible preferred shares were anti-dilutive for fiscal years ended October 31, 2021, 2020 and 2019. The computations for basic and diluted net loss per common share are as follows (in thousands, except per share amounts):
70
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Earnings Per Share (continued)
| Year ended October 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Basic net loss per common share: | |||||||||||||||||
| Net loss applicable to common stock | $ | (3,942) | $ | (16,936) | $ | (6,444) | |||||||||||
| Effect of unvested, restricted stock | (35) | (44) | (51) | ||||||||||||||
| Numerator: Net loss for basic EPS | (3,977) | (16,980) | (6,495) | ||||||||||||||
| Denominator: Weighted average common shares-basic | 17,555 | 17,666 | 17,580 | ||||||||||||||
| Basic net loss per common share | $ | (0.23) | $ | (0.96) | $ | (0.37) | |||||||||||
| Diluted net loss per common share: | |||||||||||||||||
| Numerator: Net loss for diluted EPS | $ | (3,977) | $ | (16,980) | $ | (6,495) | |||||||||||
| Weighted average common shares-basic | 17,555 | 17,666 | 17,580 | ||||||||||||||
| Effect of dilutive unvested, restricted stock and preferred stock | — | — | — | ||||||||||||||
| Denominator: Weighted average common shares-diluted | 17,555 | 17,666 | 17,580 | ||||||||||||||
| Diluted net loss per common share | $ | (0.23) | $ | (0.96) | $ | (0.37) | |||||||||||
Diluted net 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. The Company excluded 117,000, 164,000 and 119,000, unvested, restricted shares, as calculated under the treasury stock method, from its computation of diluted losses per share for the fiscal years ended October 31, 2021, 2020 and 2019, respectively.
15. Related-Party Transactions
The Company has transactions with equity method investments and various related-parties summarized in Note 8 - Equity in Investments and in the tables below (in thousands):
| October 31, 2021 | October 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance Sheet | Balance Sheet | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ref | Related Party | Receivables/Other from Related Parties | Other Assets | Payables to Related Parties | Other Long-Term Liabilities | Receivables/Other from Related Parties | Other Assets | Payables to Related Parties | Other Long-Term Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| 2 | Mutual water companies | $ | — | $ | 432 | $ | 40 | $ | — | $ | — | $ | 64 | $ | 64 | $ | — | |||||||||||||||||||||||||||||||||||||||
| 3 | Cooperative association | $ | — | $ | — | $ | 19 | $ | — | $ | — | $ | — | $ | 123 | $ | — | |||||||||||||||||||||||||||||||||||||||
| 5 | Cadiz / Fenner / WAM | $ | — | $ | 1,386 | $ | 273 | $ | 1,297 | $ | — | $ | 1,443 | $ | 182 | $ | 1,353 | |||||||||||||||||||||||||||||||||||||||
| 6 | Colorado River Growers | $ | — | $ | — | $ | — | $ | — | $ | 81 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| 8 | FGF | $ | 4,598 | $ | 980 | $ | 832 | $ | — | $ | 2,213 | $ | — | $ | 604 | $ | — | |||||||||||||||||||||||||||||||||||||||
| 9 | LLCB | $ | — | $ | — | $ | 5,771 | $ | — | $ | — | $ | — | $ | 5,300 | $ | — | |||||||||||||||||||||||||||||||||||||||
| 11 | Third party growers | $ | — | $ | — | $ | 41 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
71
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Related-Party Transactions (continued)
| Year Ended October 31, 2021 | Year Ended October 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statement of Operations | Consolidated Statement of Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ref | Related-Party | Net Revenue Agribusiness | Net Revenue Rental Operations | Agribusiness Expense and Other | Dividends Paid | Net Revenue Agribusiness | Net Revenue Rental Operations | Agribusiness Expense and Other | Other Income, Net | Dividends Paid | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 | Employees | $ | — | $ | 814 | $ | — | $ | — | $ | — | $ | 785 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| 2 | Mutual water companies | $ | — | $ | — | $ | 1,160 | $ | — | $ | — | $ | — | $ | 894 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| 3 | Cooperative association | $ | — | $ | — | $ | 1,750 | $ | — | $ | — | $ | — | $ | 1,849 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| 4 | Calavo | $ | 6,594 | $ | 320 | $ | 721 | $ | 503 | $ | 8,806 | $ | 330 | $ | 1,223 | $ | 220 | $ | 503 | |||||||||||||||||||||||||||||||||||||||||||
| 5 | Cadiz / Fenner / WAM | $ | — | $ | — | $ | 338 | $ | — | $ | — | $ | — | $ | 240 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| 6 | Colorado River Growers | $ | 157 | $ | — | $ | 2,772 | $ | — | $ | 603 | $ | — | $ | 6,613 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| 7 | YMIDD | $ | — | $ | — | $ | 123 | $ | — | $ | — | $ | — | $ | 139 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| 8 | FGF | $ | 4,129 | $ | — | $ | 2,884 | $ | — | $ | 10,338 | $ | — | $ | 13,478 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| 10 | Freska | $ | 128 | $ | — | $ | 150 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| 11 | Third party growers | $ | — | $ | — | $ | 147 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||
| Year Ended October 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Consolidated Statement of Operations | |||||||||||||||||||||||||||||||||||||||||
| Ref | Related Party | Net Revenue Agribusiness | Net Revenue Rental Operations | Agribusiness Expense and Other | Other Income, Net | Dividends Paid | |||||||||||||||||||||||||||||||||||
| 1 | Employees | $ | — | $ | 744 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||
| 2 | Mutual water companies | $ | — | $ | — | $ | 838 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| 3 | Cooperative association | $ | — | $ | — | $ | 1,687 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| 4 | Calavo | $ | 3,080 | $ | 400 | $ | 1,096 | $ | 250 | $ | 506 | ||||||||||||||||||||||||||||||
| 5 | Cadiz / Fenner / WAM | $ | — | $ | — | $ | 186 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| 6 | Colorado River Growers | $ | 306 | $ | — | $ | 5,476 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| 7 | YMIDD | $ | — | $ | — | $ | 150 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| 8 | FGF | $ | 14,471 | $ | — | $ | 10,300 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| 11 | Third party growers | $ | — | $ | — | $ | 10 | $ | — | $ | — | ||||||||||||||||||||||||||||||
(1) Employees - The Company rents certain of its residential housing assets to employees on a month-to-month basis and recorded rental income from employees. There were no rental payments due from employees at October 31, 2021 and 2020.
(2) Mutual water companies - The Company has representation on the boards of directors of the mutual water companies in which the Company has investments, refer to Note 10 - Other Assets. The Company recorded capital contributions, purchased water and water delivery services and had water payments due to the mutual water companies.
(3) Cooperative association - The Company has representation on the board of directors of a non-profit cooperative association that provides pest control services for the agricultural industry. The Company purchased services and supplies from and had payments due to the cooperative association.
(4) Calavo - The Company had an investment in Calavo through March 2020 and has representation on the board of directors and Calavo has an investment in the Company. The Company recorded dividend income on its investment in Calavo, paid dividends to Calavo and had avocado sales to Calavo. Additionally, the Company leases office space to Calavo and purchases storage services from Calavo.
(5) Cadiz / Fenner / WAM - A member of the Company’s board of directors serves as the CEO, President and a member of the board of directors of Cadiz, Inc. In 2013, the Company entered a long-term lease agreement (the “Lease”) with Cadiz Real Estate, LLC (“Cadiz”), a wholly owned subsidiary of Cadiz, Inc., and currently leases 670 acres located in eastern San Bernardino County, California. The annual base rental is equal to the sum of $200 per planted acre and 20% of gross revenues from the sale of harvested lemons (less operating expenses), not to exceed $1,200 per acre per year. In 2016, Cadiz assigned this lease to Fenner Valley Farms, LLC (“Fenner”), a subsidiary of Water Asset Management, LLC (“WAM”). An entity affiliated with WAM is the holder of 9,300 shares of Limoneira Company Series B-2 convertible preferred stock. Upon the adoption of ASC 842, the Company recorded a ROU asset and corresponding lease liability.
72
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Related-Party Transactions (continued)
(6) Colorado River Growers, Inc. (“CRG”) - The Company had representation on the board of directors of CRG, a non-profit cooperative association of fruit growers engaged in the agricultural harvesting business in Yuma County, Arizona. CRG was dissolved in August 2021. The Company paid harvest expense to CRG and provided harvest management and administrative services to CRG.
(7) Yuma Mesa Irrigation and Drainage District (“YMIDD”) - The Company has representation on the board of directors of YMIDD. The Company purchased water from YMIDD and had amounts payable to them for such purchases.
(8) FGF - The Company advances funds to FGF for fruit purchases, which are recorded as an asset until the sales occur and the remaining proceeds become due to FGF. Additionally, FGF provided farming, packing, by-product processing and administrative services to Trapani Fresh. The Company had a receivable from FGF for lemon sales and the sale of packing supplies and a payable due to FGF for fruit purchases and services. Effective March 1, 2021, Trapani Fresh sells the lemons it grows to FGF, who packs, markets, and sells the fruit to its customers. The Company also records revenue related to the licensing of intangible assets to FGF.
(9) LLCB - Refer to Note 7 - Real Estate Development.
(10) Freska - A member of the Company's board of directors is a majority shareholder of Freska Produce International, LLC ("Freska"). The Company had avocado sales to Freska.
(11) Third party growers - A member of the Company’s board of directors markets lemons through the Company and the Company had payments due to the member of such lemon procurement.
16. Income Taxes
A reconciliation of income before income taxes for domestic and foreign locations for the years ended October 31, 2021, 2020 and 2019 are as follows (in thousands):
| 2021 | 2020 | 2019 | |||||||||||||||
| United States | $ | (1,459) | $ | (23,195) | $ | (6,285) | |||||||||||
| Foreign | (2,704) | (3,240) | (278) | ||||||||||||||
| Income before income taxes | $ | (4,163) | $ | (26,435) | $ | (6,563) | |||||||||||
The components of the provisions for income taxes for fiscal years 2021, 2020 and 2019 are as follows (in thousands):
| 2021 | 2020 | 2019 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 37 | $ | 5,835 | $ | (7) | |||||||||||
| State | 40 | 332 | 563 | ||||||||||||||
| Foreign | — | 194 | (232) | ||||||||||||||
| Total current benefit (provision) | 77 | 6,361 | 324 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (17) | 640 | 998 | ||||||||||||||
| State | 127 | 1,177 | (302) | ||||||||||||||
| Foreign | 79 | 316 | 77 | ||||||||||||||
| Total deferred benefit | 189 | 2,133 | 773 | ||||||||||||||
| Total income tax benefit | $ | 266 | $ | 8,494 | $ | 1,097 | |||||||||||
Deferred income taxes reflect the net of temporary differences between the carrying amount of the assets and liabilities for financial reporting and income tax purposes. The components of deferred income tax assets at October 31, 2021 and 2020 are as follows (in thousands):
73
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Income Taxes (continued)
| 2021 | 2020 | ||||||||||
| Deferred income tax assets: | |||||||||||
| Reserve and other accruals | $ | 646 | $ | 643 | |||||||
| Net operating losses | 6,312 | 4,983 | |||||||||
| Right-of-use asset | 531 | 578 | |||||||||
| Minimum pension liability adjustment | 231 | 962 | |||||||||
| Amortization | — | 325 | |||||||||
| Other assets | 240 | — | |||||||||
| Interest expense limitation | 2 | 306 | |||||||||
| Stock based compensation | 493 | 549 | |||||||||
| Total deferred income tax assets | 8,455 | 8,346 | |||||||||
| Valuation allowance | (1,324) | (540) | |||||||||
| Total net deferred income tax assets | 7,131 | 7,806 | |||||||||
| Deferred income tax liabilities: | |||||||||||
| Property taxes | (161) | (173) | |||||||||
| Depreciation | (18,665) | (16,930) | |||||||||
| Amortization | (242) | — | |||||||||
| Land and other indefinite life assets | (6,581) | (6,905) | |||||||||
| Investment in joint ventures and other basis adjustments | (3,510) | (4,097) | |||||||||
| Right-of-use asset | (510) | (557) | |||||||||
| Prepaids and receivables | (260) | — | |||||||||
| Other | (55) | (1,241) | |||||||||
| Total deferred income tax liabilities | (29,984) | (29,903) | |||||||||
| Net deferred income tax liabilities | $ | (22,853) | $ | (22,097) | |||||||
| Deferred income taxes — noncurrent assets | $ | — | $ | 333 | |||||||
| Deferred income taxes — noncurrent liabilities | $ | (22,853) | $ | (22,430) | |||||||
The Company periodically evaluates the recoverability of the deferred tax assets. The Company recognized deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company has recorded a valuation allowance of $1,324,000 on the net deferred tax assets of its subsidiaries in Argentina and Chile as of October 31, 2021 as the Company does not believe it is more likely than not that these deferred tax assets will be realized due to the recent history of cumulative pre-tax book losses and lack of objectively verifiable future source of taxable income.
At October 31, 2021, the Company has recorded a deferred tax asset of $6,312,000 related to its federal, state, and foreign net operating loss carryforwards. The entire federal net operating loss is subject to the 80% taxable income limitation. The net operating losses begin to expire as follows (in thousands):
| Jurisdiction | Gross Amount | Begin to Expire | ||||||||||||
| Federal | 17,443 | Indefinite | ||||||||||||
| State | 21,277 | 10/31/2039 | ||||||||||||
| Chile | 2,248 | Indefinite | ||||||||||||
| Holland | 66 | 10/31/2025 | ||||||||||||
| Argentina | 2,390 | 10/31/2025 | ||||||||||||
74
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Income Taxes (continued)
At October 31, 2021, the Company had disallowed federal and state interest expense carryforwards of approximately zero and $2,065,000, respectively, that do not expire. Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of the domestic net operating loss and disallowed interest expense carryforwards may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities.
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||
| Provision at statutory rates | $ | 874 | (21.0) | % | $ | 5,551 | (21.0) | % | $ | 1,351 | (21.0) | % | |||||||||||||||||||||||
| State income tax, net of federal benefit | 224 | (5.4) | % | 1,431 | (5.4) | % | 316 | (4.9) | % | ||||||||||||||||||||||||||
| Dividend exclusion | — | — | 27 | (0.1) | % | 28 | (0.4) | % | |||||||||||||||||||||||||||
| Meals and entertainment | — | — | (18) | 0.1 | % | (90) | 1.4 | % | |||||||||||||||||||||||||||
| Transaction costs | — | — | — | — | (137) | 2.1 | % | ||||||||||||||||||||||||||||
| Shared-based compensation | (217) | 5.2 | % | — | — | — | — | ||||||||||||||||||||||||||||
| Executive compensation | (45) | 1.1 | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| Tax law change | 57 | (1.4) | % | 1,948 | (7.4) | % | — | — | |||||||||||||||||||||||||||
| State rate adjustment | (78) | 1.9 | % | (82) | 0.3 | % | (109) | 1.7 | % | ||||||||||||||||||||||||||
| Valuation allowance | (831) | 20.0 | % | (168) | 0.6 | % | (393) | 6.1 | % | ||||||||||||||||||||||||||
| Foreign rate differential | 130 | (3.1) | % | — | — | — | — | ||||||||||||||||||||||||||||
| Noncontrolling interest | (83) | 2.0 | % | (305) | 1.1 | % | 116 | (1.8) | % | ||||||||||||||||||||||||||
| Other permanent items | 235 | (5.7) | % | 110 | (0.4) | % | 15 | (0.3) | % | ||||||||||||||||||||||||||
| Total income tax benefit | $ | 266 | (6.4) | % | $ | 8,494 | (32.2) | % | $ | 1,097 | (17.1) | % | |||||||||||||||||||||||
At October 31, 2021 and 2020, the Company had no unrecognized tax benefits. The Company files income tax returns in the U.S., California, Arizona, Chile, Argentina and Holland. The Company is no longer subject to significant U.S., state and Chilean income tax examinations for years prior to the statutory periods of three years for federal, four years for state and three years for Chilean tax jurisdictions. The Company recognizes interest expense and penalties related to income tax matters as a component of income tax expense. There was no accrued interest or penalties associated with uncertain tax positions as of October 31, 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act includes numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, the creation of certain refundable employee retention credits, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company evaluated the impact of the CARES Act and recorded a tax benefit of $1,948,000 and an income tax refund of $5,801,000 due to its ability to carryback and obtain federal tax refund by utilizing net operating losses under the provisions of the CARES Act at October 31, 2021, of which $841,000 and $4,960,000 were received in October 2020 and December 2020, respectively. An additional $948,000 of California state refunds were received in the third quarter of fiscal year 2021.
17. Retirement Plans
The Limoneira Company Retirement Plan (the “Plan”) is a noncontributory, defined benefit, single employer pension plan, which provides retirement benefits for all eligible employees. Benefits paid by the Plan are calculated based on years of service, highest five-year average earnings, primary Social Security benefit and retirement age. Effective June 2004, the Company froze the Plan and no additional benefits accrued to participants subsequent to that date. The Plan is administered by Wells Fargo Bank and Mercer Human Resource Consulting. In fiscal year 2021, the Company decided to terminate the Plan effective December 31, 2021. The liabilities disclosed as of October 31, 2021, reflect an estimate of the additional cost to pay lump sums to a portion of the active and vested terminated participants and purchase annuities for all remaining participants from an insurance company.
The Plan is funded consistent with the funding requirements of federal law and regulations. There were no funding contributions during fiscal years 2021 or 2020. Plan assets are invested in a group trust consisting primarily of pooled funds, mutual funds, short-term investment funds and cash.
75
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Retirement Plans (continued)
The investment policy and strategy has been established to provide a total investment return that will, over time, maintain purchasing power parity for the Plan’s variable benefits and keep the Plan funding at a reasonable level. The long-term target asset allocations are Cash 1% and Fixed Income 99%.
The following tables set forth the Plan’s net periodic cost, changes in benefit obligation and Plan assets, funded status, amounts recognized in the Company’s consolidated balance sheets, additional year-end information and assumptions used in determining the benefit obligations and net periodic benefit cost.
The components of net periodic benefit cost for the Plan for fiscal years 2021 and 2020 were as follows (in thousands):
| 2021 | 2020 | ||||||||||
| Administrative expenses | $ | 277 | $ | 278 | |||||||
| Interest cost | 550 | 641 | |||||||||
| Expected return on plan assets | (867) | (990) | |||||||||
| Prior service cost | 45 | 45 | |||||||||
| Amortization of net loss | 737 | 739 | |||||||||
| Net periodic benefit cost | $ | 742 | $ | 713 | |||||||
Following is a summary of the Plan’s funded status as of October 31 (in thousands):
| 2021 | 2020 | ||||||||||
| Change in benefit obligation: | |||||||||||
| Benefit obligation at beginning of year | $ | 22,898 | $ | 22,267 | |||||||
| Administrative expenses | 277 | 278 | |||||||||
| Interest cost | 550 | 641 | |||||||||
| Benefits paid | (1,450) | (1,524) | |||||||||
| Actuarial (gain) loss | (858) | 1,236 | |||||||||
| Benefit obligation at end of year | $ | 21,417 | $ | 22,898 | |||||||
| Change in plan assets: | |||||||||||
| Fair value of plan assets at beginning of year | $ | 19,352 | $ | 19,229 | |||||||
| Actual return on plan assets | 2,668 | 1,647 | |||||||||
| Benefits paid | (1,450) | (1,524) | |||||||||
| Fair value of plan assets at end of year | $ | 20,570 | $ | 19,352 | |||||||
| Reconciliation of funded status: | |||||||||||
| Fair value of plan assets | $ | 20,570 | $ | 19,352 | |||||||
| Benefit obligations | 21,417 | 22,898 | |||||||||
| Net plan obligations | $ | (847) | $ | (3,546) | |||||||
| Amounts recognized in statements of financial position: | |||||||||||
| Noncurrent liabilities | $ | (847) | $ | (3,546) | |||||||
| Net obligation recognized in statements of financial position | $ | (847) | $ | (3,546) | |||||||
| Reconciliation of amounts recognized in statements of financial position: | |||||||||||
| Prior service cost | $ | (99) | $ | (144) | |||||||
| Net loss | (2,766) | (6,162) | |||||||||
| Accumulated other comprehensive loss | (2,865) | (6,306) | |||||||||
| Accumulated contributions in excess of net periodic benefit cost | 2,018 | 2,760 | |||||||||
| Net deficit recognized in statements of financial position | $ | (847) | $ | (3,546) | |||||||
76
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Retirement Plans (continued)
Presented below are changes in accumulated other comprehensive income, before tax, in the Plan as of October 31, (in thousands):
| 2021 | 2020 | ||||||||||
| Changes recognized in other comprehensive income: | |||||||||||
| Net (gain) loss arising during the year | $ | (2,658) | $ | 579 | |||||||
| Amortization of prior service cost | (45) | (45) | |||||||||
| Amortization of net loss | (737) | (739) | |||||||||
| Total recognized in other comprehensive income | $ | (3,440) | $ | (205) | |||||||
| Total recognized in net periodic benefit and other comprehensive income | $ | (2,699) | $ | 508 | |||||||
The following assumptions, as of October 31, were used in determining benefit obligations and net periodic benefit cost ($ in thousands):
| 2021 | 2020 | ||||||||||
| Weighted-average assumptions used to determine benefit obligations: | |||||||||||
| Discount rate | 2.58 | % | 2.50 | % | |||||||
| Assumptions used to determine net periodic benefit cost: | |||||||||||
| Discount rate | 2.50 | % | 3.00 | % | |||||||
| Expected return on plan assets | 5.05 | % | 5.66 | % | |||||||
| Additional year-end information: | |||||||||||
| Projected benefit obligation | $ | 21,417 | $ | 22,898 | |||||||
| Accumulated benefit obligation | $ | 21,417 | $ | 22,898 | |||||||
| Fair value of plan assets | $ | 20,570 | $ | 19,352 | |||||||
Benefit payments are expected to be paid over the next 10 fiscal years as follows (in thousands):
| 2022 | $ | 1,120 | |||
| 2023 | 20,835 | ||||
| 2024 - 2026 | — | ||||
| Next five years | — | ||||
| $ | 21,955 | ||||
The following table sets forth the Plan’s assets as of October 31, 2021, segregated by level using the hierarchy established by FASB ASC 820, Fair Value Measurements and Disclosures (in thousands):
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash and cash equivalents | $ | 250 | $ | — | $ | — | $ | 250 | |||||||||||||||
| Pooled funds | — | 20,320 | — | 20,320 | |||||||||||||||||||
| $ | 250 | $ | 20,320 | $ | — | $ | 20,570 | ||||||||||||||||
The Company has a 401(k) plan in which an employee can participate after one year of employment. Employees may elect to defer up to 100% of their annual earnings subject to Internal Revenue Code limits. The Company makes a matching contribution on these deferrals up to 4% of the employee’s annual earnings. Participants vest in any matching contribution at a rate of 20% per year beginning after one year of employment. During fiscal years 2021, 2020 and 2019, the Company contributed to the plan and recognized expenses of $546,000, $1,107,000 and $927,000, respectively.
77
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Commitments and Contingencies
Litigation and Legal Proceedings
The Company is from time to time involved in various lawsuits and legal proceedings that arise in the ordinary course of business. At this time, the Company is not aware of any pending or threatened litigation against it that it expects will have a material adverse effect on its business, financial condition, liquidity, or operating results. Legal claims are inherently uncertain, however, and it is possible that the Company’s business, financial condition, liquidity and/or operating results could be adversely affected in the future by legal proceedings.
19. Series B and Series B-2 Preferred Stock
Series B Convertible Preferred Stock
In 1997, in connection with the acquisition of Ronald Michaelis Ranches, Inc., the Company issued 30,000 shares of Series B Convertible Preferred Stock at $100.00 par value (the “Series B Stock”).
Dividends: The holders of shares of Series B Stock are entitled to receive cumulative cash dividends at an annual rate of 8.75% of par value. Such dividends are payable quarterly on the first day of January, April, July and October in each year.
Voting Rights: Each holder of Series B Stock is entitled to ten votes on all matters submitted to a vote of the stockholders of the Company.
Redemption: The Company, at the option of the Board of Directors, may redeem the Series B Stock, as a whole or in part, at any time or from time to time on or after August 1, 2017 and before July 31, 2027, at a redemption price equal to the par value thereof, plus accrued and unpaid dividends thereon to the date fixed for redemption. Redemption by the Company of a portion of the Series B Stock totaling 14,790 shares is subject to certain conditions agreed upon between the Company and the holders of this portion of the Series B Stock.
Conversion: The holders of Series B Stock have the right, at their option, to convert such shares into shares of Common Stock of the Company at any time prior to redemption. The conversion price is $8.00 per share of Common Stock. Pursuant to the terms of the Certificate of Designation, Preferences and Rights of the Series B Stock, the conversion price shall be adjusted to reflect any dividends paid in Common Stock of the Company, the subdivision of the Common Stock of the Company into a greater number of shares of Common Stock of the Company or upon the advice of legal counsel.
Put: The holders of Series B Stock may at any time after July 1, 2017 and before June 30, 2027 cause the Company to repurchase such shares at a repurchase price equal to the par value thereof, plus accrued and unpaid dividends thereon to the date fixed for repurchase. The put features of a portion of the Series B Stock totaling 14,790 shares are subject to certain conditions agreed upon between the Company and the holders of this portion of the Series B Stock.
Because the Series B Stock may be redeemed by holders of the shares at their discretion beginning July 1, 2017, the redemption is outside the control of the Company and accordingly, the Series B Stock has been classified as temporary equity.
During fiscal years 2015 thru 2017, a total of 15,210 shares of Series B preferred stock were converted into 190,124 shares of common stock.
Series B-2 Convertible Preferred Stock
During March and April of 2014, pursuant to a Series B-2 Stock Purchase Agreement dated March 21, 2014, the Company issued an aggregate of 9,300 shares of Series B-2, 4% voting preferred stock with a par value of $100.00 per share (“Series B-2 Preferred Stock”) to WPI-ACP Holdings, LLC (“WPI”), an entity affiliated with WAM for total proceeds of $9,300,000. The transactions were exempt from the registration requirements of the Securities Act of 1933, as amended. The Series B-2 Preferred Stock has the following rights, preferences, privileges, and restrictions:
Conversion: Each share of Series B-2 Preferred Stock is convertible into common stock at a conversion price equal to the greater of (a) the then-market price of the Company’s common stock based upon the closing price of the Company’s common stock on The NASDAQ Stock Market, LLC or on such other principal market on which the Company’s common stock may be trading or (b) $15.00 per share of common stock. Shares of Series B-2 Preferred Stock may be converted into common stock (i) at any time prior to the redemption thereof, or (ii) in the event the Option Agreement (as defined below) is terminated without all of the shares of Series B-2 Preferred Stock having been redeemed, within 30 calendar days following such termination.
Dividends: The holder of shares of the Series B-2 Preferred Stock is entitled to receive cumulative cash dividends at an annual rate of 4% of the liquidation value of $1,000 per share. Such dividends are payable quarterly on the first day of January, April, July and October in each year.
78
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. Series B and Series B-2 Preferred Stock (continued)
Series B-2 Convertible Preferred Stock
Liquidation Rights: In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holder of shares of the Series B-2 Preferred Stock is entitled to be paid out of the assets available for distribution, before any payment is made to the holders of the Company’s common stock or any other series or class of the Company’s shares ranking junior to the Series B-2 Preferred Stock, an amount equal to the liquidation value of $1,000 per share, plus an amount equal to all accrued and unpaid dividends.
Voting Rights: Each share of Series B-2 Preferred Stock is entitled to one vote on all matters submitted to a vote of the Company’s stockholders.
Redemption: The Company may redeem shares of Series B-2 Preferred Stock only (i) from WPI or its designee and (ii) upon, and to the extent of, an election to exercise the option pursuant to the Option Agreement, described below, at a redemption price equal to the liquidation value of $1,000 per share plus accrued and unpaid dividends.
Because the Series B-2 Preferred Stock may be redeemed by WPI at its discretion with the exercise of the Option Agreement, the redemption is outside the control of the Company and accordingly, the Series B-2 Preferred Stock has been classified as temporary equity.
In connection with the sale of the Series B-2 Preferred Stock, Associated Citrus Packers, Inc. (“Associated”) and another affiliate of WAM (“WPI-ACP”), entered into a series of agreements related to the future ownership and disposition of farmland with associated Colorado River water rights and other real estate that is held by Associated in Yuma, Arizona. The agreements allow the parties to explore strategies that will make the highest and best use of those assets, including but not limited to the sale or lease of assets or the expansion of a fallowing and water savings program in which a portion of Associated’s property is currently enrolled.
The net proceeds of any monetization event would be shared equally by the parties. The agreements entered into include a Water Development Agreement and an Option Agreement. Pursuant to the Water Development Agreement, Associated granted WPI-ACP exclusive rights to develop water assets attributable to the real estate owned by Associated for the mutual benefit of Associated and WAM. Pursuant to the Option Agreement, Associated granted WPI-ACP an option to purchase an undivided interest of up to one-half of the real estate owned by Associated in Yuma County, Arizona (the “Property”) and the water rights associated therewith until January 1, 2026. The purchase price for the Property subject to the Option Agreement will be paid via the redemption by the Company of a proportionate percentage of the Series B-2 Preferred Stock. Unless and until a definitive agreement or definitive agreements with respect to Associated’s real estate and water rights is entered into that would cause the cessation of farming operations, Associated expects to continue farming the Property and recognize all results of operations and retain all proceeds from such operations.
20. Stockholders’ Equity
Series A Junior Participating Preferred Stock
The Company has 20,000 shares of preferred stock authorized as Series A Junior Participating Preferred Stock at $0.01 par value (the “Series A Stock”). No shares are issued or outstanding.
Stock-based compensation
The Company has a stock-based compensation plan (the “Stock Plan”) that allows for the grant of common stock of the Company to members of management, key executives and non-employee directors. The fair value of such awards is based on the fair value of the Company's stock on the date of grant and all are classified as equity awards. The Stock Plan has 156,036 remaining shares available to be issued as of October 31, 2021.
Performance Awards
Certain restricted stock grants are made to management each December under the Stock Plan based on the achievement of certain annual financial performance and other criteria achieved during the previous fiscal year (“Performance Awards”). The performance grants are based on a percentage of the employee’s base salary divided by the stock price on the grant date once the performance criteria has been met, and generally vest over a two-year period as service is provided. During December 2021, 2020 and 2019, there were no Performance Awards of restricted stock granted for fiscal year 2021, 2020 or 2019 performance because the financial performance and other criteria were not met.
79
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. Stockholders’ Equity (continued)
Stock-based compensation
Executive Awards
Certain restricted stock grants are made to key executives under the Stock Plan (“Executive Awards”). These grants generally vest over a to five-year period as service is provided. During December 2021, subsequent to fiscal year 2021, the Company granted 70,000 shares of common stock with a per share price of $14.96 to key executives under the Stock Plan. The related compensation expense of approximately $1,047,000 will be recognized equally over the next three years as the shares vest.
Director Awards
The Company issues shares of common stock to non-employee directors under the Stock Plan on an annual basis that vest upon grant (“Director Awards”).
A summary of the Performance, Executive, and Director awards granted under the Stock Plan during fiscal years 2021, 2020 and 2019, and the weighted average grant price is as follows:
| Year Ended October 31, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Number of Shares | Weighted-Average Grant Price | Number of Shares | Weighted-Average Grant Price | Number of Shares | Weighted-Average Grant Price | ||||||||||||||||||||||||
| Performance Awards | — | $ | — | — | $ | — | 40,095 | $ | 18.74 | ||||||||||||||||||||
| Executive Awards | 95,000 | $ | 15.26 | 95,000 | $ | 18.87 | 90,000 | $ | 19.84 | ||||||||||||||||||||
| Director Awards | 30,663 | $ | 16.85 | 17,841 | $ | 20.05 | 15,642 | $ | 21.65 | ||||||||||||||||||||
| Total | 125,663 | $ | 15.65 | 112,841 | $ | 19.06 | 145,737 | $ | 19.73 | ||||||||||||||||||||
The Company recognized $2,582,000, $2,044,000 and $1,791,000 of stock-based compensation in fiscal years 2021, 2020 and 2019, respectively, of which substantially all of the expense has been included in selling, general and administrative expenses for all years presented. Forfeitures are accounted for in the period that the forfeiture occurs. The income tax benefit recognized in the income statement for stock-based compensation arrangements was $476,000, $400,000 and $324,000 for fiscal years 2021, 2020 and 2019, respectively. The total fair value of shares vested during the years ended October 31, 2021, 2020 and 2019 was $2,951,000, $2,365,000 and $1,788,000 respectively. The Company has unrecognized stock-based compensation expense of $1,963,000 as of October 31, 2021, which is expected to be recognized over the next two years as the shares vest. All unvested shares are expected to vest.
During fiscal years 2021, 2020 and 2019, respectively, members of management exchanged 46,993, 11,314 and 36,627 shares of common stock with fair values of $701,000, $213,000 and $606,000, at the dates of the exchanges, for the payment of payroll taxes associated with the vesting of shares under the Company’s stock-based compensation programs.
A summary of the status of the Company’s nonvested shares as of October 31, 2021, and changes during the year ended October 31, 2021, is presented below:
| Number of Shares | Weighted-Average Grant Price | |||||||||||||
| Nonvested at October 31, 2020 | 148,460 | $ | 19.85 | |||||||||||
| Granted | 125,663 | $ | 15.65 | |||||||||||
| Vested | (161,123) | $ | 18.31 | |||||||||||
| Nonvested at October 31, 2021 | 113,000 | $ | 17.38 | |||||||||||
Treasury Stock
Share Repurchase Program
In fiscal year 2021, the Company's Board of Directors approved a share repurchase program authorizing it to repurchase up to $10,000,000 of its outstanding shares of common stock through September 2022; no shares have been repurchased under this program. In fiscal year 2020, the Company repurchased 250,977 shares for $3,493,000 under a program which expired in March 2021.
80
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. Stockholders’ Equity (continued)
Dividend
On December 14, 2021, the Company declared a $0.075 per share dividend payable on January 14, 2022, in the aggregate amount of $1,328,000 to common shareholders of record as of December 27, 2021.
21. Fruit Growers Supply Cooperative
The Company is a member of Fruit Growers Supply (“FGS”), a cooperative supply corporation. FGS is the manufacturing and supply affiliate of Sunkist and allocates after-tax earnings derived from non-member business to members. The Company records allocations disbursed by FGS as reductions of agribusiness expenses. The Company had been allocated $729,000, of which the Company received dividends of $216,000, $513,000 and zero in fiscal years 2021, 2020 and 2019, respectively, and there are no remaining allocations outstanding as of October 31, 2021.
22. Segment Information
The Company operates in four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness. The reportable operating segments of the Company are strategic business units with different products and services, distribution processes and customer bases. The fresh lemons segment includes sales, farming and harvesting expenses and third-party grower and supplier costs relative to fresh lemons. The lemon packing segment includes packing revenues and shipping and handling revenues relative to lemon packing. The lemon packing segment expenses are comprised of lemon packing costs. The lemon packing segment revenues include intersegment revenues between fresh lemons and lemon packing. The intersegment revenues are included gross in the segment note and a separate line item is shown as an elimination. The avocados segment includes sales, farming and harvest costs. The other agribusiness segment includes sales, farming and harvest costs of oranges, specialty citrus and other crops. Revenues related to rental operations are included in “Corporate and Other.”
The Company does not separately allocate depreciation and amortization to its fresh lemons, lemon packing, avocados and other agribusiness segments. No asset information is provided for reportable operating segments, as these specified amounts are not included in the measure of segment profit or loss reviewed by the Company’s chief operating decision maker. The Company measures operating performance, including revenues and operating income, of its operating segments and allocates resources based on its evaluation. The Company does not allocate selling, general and administrative expense, total other income (expense) and income taxes, or specifically identify them to its operating segments. The Company earns packing revenue for packing lemons grown on its orchards and lemons procured from third-party growers and suppliers. Intersegment revenues represent packing revenues related to lemons grown on the Company’s orchards.
Segment information for fiscal year 2021 (in thousands):
| Fresh Lemons | Lemon Packing | Eliminations | Avocados | Other Agribusiness | Total Agribusiness | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 125,448 | $ | 17,514 | $ | — | $ | 6,784 | $ | 11,635 | $ | 161,381 | $ | 4,646 | $ | 166,027 | |||||||||||||||||||||||||||||||
| Intersegment revenue | — | 25,637 | (25,637) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total net revenues | 125,448 | 43,151 | (25,637) | 6,784 | 11,635 | 161,381 | 4,646 | 166,027 | |||||||||||||||||||||||||||||||||||||||
| Costs and expenses | 116,117 | 36,018 | (25,637) | 4,211 | 9,157 | 139,866 | 22,682 | 162,548 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | — | — | — | — | — | 8,626 | 1,186 | 9,812 | |||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 9,331 | $ | 7,133 | $ | — | $ | 2,573 | $ | 2,478 | $ | 12,889 | $ | (19,222) | $ | (6,333) | |||||||||||||||||||||||||||||||
Segment information for fiscal year 2020 (in thousands):
| Fresh Lemons | Lemon Packing | Eliminations | Avocados | Other Agribusiness | Total Agribusiness | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 124,150 | $ | 13,413 | $ | — | $ | 8,806 | $ | 13,568 | $ | 159,937 | $ | 4,622 | $ | 164,559 | |||||||||||||||||||||||||||||||
| Intersegment revenue | — | 36,820 | (36,820) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total net revenues | 124,150 | 50,233 | (36,820) | 8,806 | 13,568 | 159,937 | 4,622 | 164,559 | |||||||||||||||||||||||||||||||||||||||
| Costs and expenses | 125,305 | 42,563 | (36,820) | 5,168 | 12,122 | 148,338 | 25,132 | 173,470 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | — | — | — | — | — | 8,943 | 1,154 | 10,097 | |||||||||||||||||||||||||||||||||||||||
| Operating (loss) income | $ | (1,155) | $ | 7,670 | $ | — | $ | 3,638 | $ | 1,446 | $ | 2,656 | $ | (21,664) | $ | (19,008) | |||||||||||||||||||||||||||||||
81
LIMONEIRA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. Segment Information (continued)
Segment information for fiscal year 2019 (in thousands):
| Fresh Lemons | Lemon Packing | Eliminations | Avocados | Other Agribusiness | Total Agribusiness | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | 134,342 | $ | 15,629 | $ | — | $ | 5,391 | $ | 11,187 | $ | 166,549 | $ | 4,849 | $ | 171,398 | |||||||||||||||||||||||||||||||
| Intersegment revenue | — | 30,073 | (30,073) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total net revenues | 134,342 | 45,702 | (30,073) | 5,391 | 11,187 | 166,549 | 4,849 | 171,398 | |||||||||||||||||||||||||||||||||||||||
| Costs and expenses | 120,998 | 37,639 | (30,073) | 3,150 | 13,035 | 144,749 | 23,530 | 168,279 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | — | — | — | — | — | 7,623 | 1,010 | 8,633 | |||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 13,344 | $ | 8,063 | $ | — | $ | 2,241 | $ | (1,848) | $ | 14,177 | $ | (19,691) | $ | (5,514) | |||||||||||||||||||||||||||||||
The following is a detail of other agribusiness revenues for fiscal years 2021, 2020 and 2019 (in thousands):
| Year Ended October 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Oranges | $ | 4,382 | $ | 7,722 | $ | 6,022 | |||||||||||
| Specialty citrus and other crops | 7,253 | 5,846 | 5,165 | ||||||||||||||
| Other agribusiness revenues | $ | 11,635 | $ | 13,568 | $ | 11,187 | |||||||||||
23. Subsequent Events
The Company has evaluated events subsequent to October 31, 2021 through the date of this filing, to assess the need for potential recognition or disclosure in this Annual Report. Based upon this evaluation, except as disclosed in the notes to consolidated financial statements, it was determined that no other subsequent events occurred that require recognition or disclosure in the consolidated financial statements.
82
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures. As of October 31, 2021, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.
Remediation of Material Weakness. As previously disclosed in our Annual Report for the fiscal year ended October 31, 2020, although there were no material errors that resulted from control deficiencies, we identified a material weakness in our internal control over financial reporting related to the inadequate design and operating effectiveness of certain controls in the areas of journal entries and agribusiness revenues and expenses related to an acquired foreign subsidiary in the first year the subsidiary was included in management’s evaluation of the effectiveness of the Company’s internal control over financial reporting.
We have remediated this material weakness by implementing new policies and procedures to enhance (a) the design of our process level controls over the recording of journal entries and controls over revenues and expenses at the foreign subsidiary where we identified the control deficiencies and (b) management’s review controls over financial information of the foreign subsidiary. Our implementation of the new policies and procedures included the hiring of new resources, establishment of clear responsibilities to comply with the new policies and procedures, and testing sufficient occurrences of these newly designed and implemented controls to evaluate its operating effectiveness. The remediation measures have strengthened the design and operating effectiveness of our internal control over financial reporting.
We assessed the impact of the remediated material weakness to the consolidated financial statements to ensure that the Company’s consolidated financial statements were prepared in accordance with GAAP and accurately reflect its financial position and results of operation for the year ended October 31, 2021. As a result, management concluded that the consolidated financial statements included in this Annual Report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
Internal Control over Financial Reporting. Refer to “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” below.
Management’s Report on Internal Control over Financial Reporting
Management of Limoneira Company (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Exchange Act Rule 13a-15(f). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management, including the principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of Limoneira Company’s internal control over financial reporting, based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that internal control over financial reporting was effective as of October 31, 2021. Deloitte & Touche LLP, an independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting and has issued a report on internal control over financial reporting, which is included herein.
Harold S. Edwards
President and Chief Executive Officer
Mark Palamountain
Chief Financial Officer, Treasurer and Corporate Secretary
83
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Limoneira Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Limoneira Company and subsidiaries (the “Company”) as of October 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended October 31, 2021, of the Company and our report dated January 10, 2022, expressed an unqualified opinion on those financial statements based on our audit and the report of the other auditors.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ Deloitte & Touche LLP | ||||||||
Los Angeles, California
January 10, 2022
84
Changes in Internal Control over Financial Reporting. There have been no significant changes in our internal control over financial reporting during the quarter ended October 31, 2021 or, to our knowledge, in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls. Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Certain information required by Part III is omitted from this Annual Report because we will file a definitive Proxy Statement for the Annual Meeting of Stockholders pursuant to Regulation 14A of the Exchange Act (the “Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report, and the applicable information included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this item is incorporated herein by reference to the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the Proxy Statement.
85
Part IV
Item 15. Exhibits and Financial Statement Schedules
| (a)(1) | Financial Statements | ||||
| Management’s Report on Internal Control over Financial Reporting | |||||
| Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting | |||||
| Report of Independent Registered Public Accounting Firm | |||||
| Consolidated Financial Statements of Limoneira Company | |||||
Consolidated Balance Sheets at October 31, 2021 and 2020 | |||||
Consolidated Statements of Operations for the years ended October 31, 2021, 2020 and 2019 | |||||
Consolidated Statements of Comprehensive Loss for the years ended October 31, 2021, 2020 and 2019 | |||||
Consolidated Statements of Stockholders’ Equity and Temporary Equity for the years ended October 31, 2021, 2020 and 2019 | |||||
Consolidated Statements of Cash Flows for the years ended October 31, 2021, 2020 and 2019 | |||||
| Notes to Consolidated Financial Statements | |||||
| (a)(2) | Financial Statement Schedules | ||||
| Per Item 15(a)(2), list the following documents filed as part of the report: those financial statements required to be filed by Item 8 of this Form 10-K, and by paragraph (b) below. | |||||
| (b) | Exhibits | ||||
| See “Exhibit Index” set forth on page 88. | |||||
| (c) | Financial Statement Schedules | ||||
| Per Item 15(c), registrants shall file, as financial statement schedules to this Form 10-K, the financial statements required by Regulation S-X (17 CFR 210) which are excluded from the annual report to shareholders by Rule 14a-3(b) including: (1) separate financial statements of subsidiaries not consolidated and fifty percent or less owned persons; (2) separate financial statements of affiliates whose securities are pledged as collateral; and (3) schedules. | |||||
Item 16. Form 10-K Summary
None
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on January 10, 2022.
| LIMONEIRA COMPANY | |||||||||||
| By: | /s/ Harold S. Edwards | ||||||||||
| Harold S. Edwards | |||||||||||
| Director, President and Chief Executive Officer | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on January 10, 2022, by the following persons on behalf of the registrant and in the capacities indicated:
| Signature | Title | |||||||
| /s/ Gordon E. Kimball | Chairman of the Board of Directors | |||||||
| Gordon E. Kimball | ||||||||
| /s/ Harold S. Edwards | Director, President and Chief Executive Officer | |||||||
| Harold S. Edwards | (Principal Executive Officer) | |||||||
| /s/ Mark Palamountain | Chief Financial Officer, Treasurer | |||||||
| Mark Palamountain | and Corporate Secretary (Principal Financial and Accounting Officer) | |||||||
| /s/ Amy Fukutomi | Director | |||||||
| Amy Fukutomi | ||||||||
| /s/ Donald R. Rudkin | Director | |||||||
| Donald R. Rudkin | ||||||||
| /s/ Edgar Terry | Director | |||||||
| Edgar Terry | ||||||||
| /s/ Elizabeth Blanchard Chess | Director | |||||||
| Elizabeth Blanchard Chess | ||||||||
| /s/ Elizabeth Mora | Director | |||||||
| Elizabeth Mora | ||||||||
| /s/ Jesus Loza | Director | |||||||
| Jesus Loza | ||||||||
| /s/ John W.H. Merriman | Director | |||||||
| John W.H. Merriman | ||||||||
| /s/ Robert M. Sawyer | Director | |||||||
| Robert M. Sawyer | ||||||||
| /s/ Scott S. Slater | Director | |||||||
| Scott S. Slater | ||||||||
87
EXHIBIT INDEX
| Exhibit No. | Description | |||||||
| 2.1 | ||||||||
| 2.2 | ||||||||
| 2.3 | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.5 | ||||||||
88
| Exhibit No. | Description | |||||||
| 4.6 | ||||||||
| 4.7* | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8 | ||||||||
| 10.9 | ||||||||
| 10.10 | ||||||||
| 10.11 | ||||||||
| 10.12 | ||||||||
89
| Exhibit No. | Description | |||||||
| 10.13† | ||||||||
| 10.14† | ||||||||
| 10.15† | ||||||||
| 10.16 | ||||||||
| 10.17 | ||||||||
| 10.18 | ||||||||
| 10.19 | ||||||||
| 10.20 | ||||||||
| 10.21 | ||||||||
| 10.22 | ||||||||
| 10.23 | ||||||||
| 10.24 | ||||||||
| 10.25 | ||||||||
90
| Exhibit No. | Description | |||||||
| 10.26 | ||||||||
| 10.27 | ||||||||
| 10.28 | ||||||||
| 10.29 | ||||||||
| 10.30 | ||||||||
| 10.31 | ||||||||
| 10.32 | ||||||||
| 10.33 | ||||||||
| 10.34 | ||||||||
| 10.35 | ||||||||
| 10.36 | ||||||||
| 10.37† | ||||||||
| 10.38 | ||||||||
91
| Exhibit No. | Description | |||||||
| 10.39† | ||||||||
| 10.40 | ||||||||
| 10.41† | ||||||||
| 10.42 | ||||||||
| 10.43 | ||||||||
| 10.44 | ||||||||
| 10.45 | ||||||||
| 10.46† | ||||||||
| 10.47 | ||||||||
| 10.48 | ||||||||
| 10.49 | ||||||||
| 10.50 | ||||||||
| 10.51 | ||||||||
92
| Exhibit No. | Description | |||||||
| 16.1 | ||||||||
| 21.1* | ||||||||
| 23.1* | ||||||||
| 23.2* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 99.1* | ||||||||
| 101.INS* | XBRL Instance Document | |||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | |||||||
| * | Filed or furnished herewith. In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. | |||||||
| † | Denotes management contracts and compensatory plans or arrangements. | |||||||
93