Limoneira(LMNR) - 2019 Q4 - Annual Report

PART I This section provides a comprehensive overview of Limoneira Company's business operations, including its agribusiness, rental, and real estate divisions, along with associated risks, property holdings, and legal status Business Limoneira Company is a diversified agribusiness and real estate development firm founded in 1893, operating through three main divisions: Agribusiness, Rental Operations, and Real Estate Development - The company operates across three business divisions: agribusiness, rental operations, and real estate development[30] Revenue Contribution by Division (FY2017-2019) | Division | FY2019 Revenue % | FY2018 Revenue % | FY2017 Revenue % | | :--- | :--- | :--- | :--- | | Agribusiness | 97% | 96% | 96% | | Rental Operations | 3% | 4% | 4% | | Real Estate Development | 0% | 0% | 0% | Total Planted Acreage by Crop | Crop | Acres | | :--- | :--- | | Lemons | 6,200 | | Avocados | 900 | | Oranges | 1,600 | | Specialty Citrus & Other | 1,000 | | Total Planted | 9,700 | Fiscal Year 2019 Highlights and Recent Developments The company achieved key milestones in real estate, expanded its agribusiness through acquisition, and managed its investment portfolio in fiscal year 2019 - The company's East Area I real estate joint venture with The Lewis Group (LLCB) closed initial lot sales for 210 residential units in fiscal year 2019[23] - Acquired a 51% interest in Trapani Fresh, a citrus operation in Argentina, for $15.0 million, adding approximately 1,200 acres of planted lemons[25][26] - Sold 50,000 shares of Calavo common stock for net proceeds of $4.8 million, also recording unrealized losses of $2.1 million on its remaining Calavo equity securities[27] - Sold the Mercantile property in Santa Paula for net proceeds of $4.0 million, recognizing a gain of $0.6 million, and The Terraces at Pacific Crest for net proceeds of $2.9 million, recognizing a gain of $0.4 million[28] Agribusiness Division The Agribusiness division, representing 97% of FY2019 revenues, is the core business, focusing on cultivation and sale of lemons, avocados, oranges, and specialty crops across 15,700 acres - The Agribusiness division is the company's largest, representing 97% of consolidated revenues in FY2019, comprising fresh lemons, lemon packing, avocados, and other agribusiness segments[31] - The company is one of the largest growers of lemons and avocados in the United States, with agricultural plantings in California, Arizona, Chile, and Argentina[20][32] Planted Acreage by Location and Age (Acres) | Location | 0-4 Years | 5-25 Years | Over 25 Years | Total | | :--- | :--- | :--- | :--- | :--- | | Ventura, CA | 200 | 1,200 | 1,200 | 2,600 | | Tulare, CA | 500 | 1,500 | 1,300 | 3,300 | | San Bernardino, CA | 300 | 300 | — | 600 | | San Luis Obispo, CA | 200 | 100 | — | 300 | | Yuma, AZ | 400 | 800 | — | 1,200 | | La Serena, Chile | — | 500 | — | 500 | | Jujuy, Argentina | — | 1,200 | — | 1,200 | | Total | 1,600 | 5,600 | 2,500 | 9,700 | - All avocado production is provided to Calavo Growers, Inc. for packing and marketing, a relationship dating back to 2003[38] Rental Operations Division The Rental Operations division contributed approximately 3% of FY2019 consolidated revenues, providing stable cash flows from residential and commercial properties and leased agricultural land - The Rental Operations division contributed approximately 3% of consolidated revenues in FY2019, providing reliable cash flows[59] - The division includes approximately 260 residential housing units, several commercial office buildings, about 500 acres of leased agricultural land, and an organic recycling program[60][61][62][63] Real Estate Development Division The Real Estate Development division, with no FY2019 revenue, focuses on strategic land development in California, including a major joint venture for a master-planned community - The Real Estate Development division, which had no revenue in FY2019, focuses on strategic land development in California with approximately 1,500 residential units in various stages of planning[64][65] - The primary project is East Area I in Santa Paula, a 523-acre master-planned community being developed through a joint venture (LLCB) with The Lewis Group, with Phase 1 including approximately 632 residential units[65][66][67] - The company is also planning the development of East Area II, an adjacent 30-acre parcel suited for commercial and/or industrial use[68] Risk Factors The company faces a range of risks inherent to its diverse operations, including adverse weather, crop diseases, price volatility, economic cycles, interest rate fluctuations, and complex land use regulations Risks Related to Our Agribusiness Division The agribusiness division faces significant threats from adverse weather, natural disasters, crop diseases like Huanglongbing (HLB), price volatility, water scarcity, and labor availability - Crops are vulnerable to adverse weather, natural disasters like earthquakes and wildfires, and the effects of climate change, which can reduce crop size and quality[89][91] - The business faces significant threats from crop diseases and pests, particularly the Asian Citrus Psyllid (ACP) and the incurable disease it transmits, Huanglongbing (HLB), with the company incurring approximately $0.9 million in costs in FY2019 for pest control against ACP[93][94][95] - Earnings are sensitive to market supply, price fluctuations, and demand for produce, which is highly perishable, with excess supplies often leading to severe price competition[103][104] - The company is dependent on its relationship with Calavo for the sale of 100% of its avocado production, and any disruption to this relationship could harm sales[101][102] - A lack of sufficient water, particularly due to extended droughts in California, could severely impact the ability to produce crops, as the company is dependent on rights to pump water from underground aquifers[114] - Changes in immigration laws could impact the availability of labor for harvesting operations, potentially increasing costs or leading to crop loss[113] Risks Related to Our Indebtedness The company's indebtedness includes restrictive covenants that limit financial flexibility and expose it to variable interest rate risk, with non-compliance on a debt service covenant in FY2019 requiring waivers - The company's credit facilities contain restrictive covenants that limit its ability to incur additional debt, make certain investments, or sell assets, which could restrict financial and operating flexibility[140][143] - As of October 31, 2019, the company was not in compliance with the debt service coverage ratio covenant required by its Farm Credit West and Wells Fargo loans, but received waivers from the lenders[140] - A portion of the company's debt is subject to variable interest rates, exposing it to higher interest expenses if rates increase, and the expected discontinuation of LIBOR after 2021 presents an additional risk[145] Risks Related to Our Real Estate Development Division The real estate development division is highly sensitive to economic conditions, subject to extensive land use regulations and governmental approvals, and relies on joint ventures, introducing partnership and financing risks - The real estate development industry is cyclical and highly sensitive to changes in economic conditions, employment levels, interest rates, and consumer confidence[146] - Development projects are subject to extensive land use regulations and require governmental approvals, which can be denied, delayed, or challenged by third-party litigation, increasing time and cost[149][151] - The company relies on a joint venture with The Lewis Group for its East Area I project, which introduces risks such as potential disagreements between partners, inability to obtain project loans, or failure to meet financial expectations[160][161] Properties The company owns approximately 14,100 acres of land, including 9,700 planted acres for agribusiness, corporate facilities, and residential units, supported by extensive water rights crucial for operations Owned Agribusiness Land Holdings (as of Oct 31, 2019) (Acres) | Location | Acres | | :--- | :--- | | California | 8,700 | | Arizona | 1,300 | | Chile | 3,500 | | Argentina | 1,200 | | Total Owned | 14,700 | - The company owns its packing facilities in Santa Paula and Oxnard, California, and Yuma, Arizona, with a new lemon packing facility commissioned in 2016 doubling packing capacity[170] - Water resources are a key asset, including approximately 8,600 acre-feet of adjudicated water rights in the Santa Paula Basin and 11,700 acre-feet of Class 3 Colorado River water rights in Arizona[174][178] Legal Proceedings The company is not a party to any material pending legal proceedings, with occasional involvement in routine legal matters not expected to have a material adverse effect - The company is not currently party to any material pending legal proceedings[182] PART II This section details Limoneira Company's common stock market, selected financial data, management's discussion and analysis of financial performance, market risks, and consolidated financial statements Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "LMNR", with approximately 222 registered holders as of December 31, 2019, and a history of quarterly dividends - The company's common stock is traded on The NASDAQ Stock Market LLC under the symbol "LMNR"[185] Cash Dividends Per Common Share ($) | Quarter | 2019 | 2018 | | :--- | :--- | :--- | | Q1 | $0.0750 | $0.0625 | | Q2 | $0.0750 | $0.0625 | | Q3 | $0.0750 | $0.0625 | | Q4 | $0.0750 | $0.0625 | - In Q4 2019, the company purchased 16,573 shares at an average price of $18.98 per share from employees to cover income tax withholding on vested restricted stock awards[193] Selected Financial Data Over fiscal years 2015-2019, total net revenues grew from $100.3 million to $171.4 million, but FY2019 saw an operating loss of $5.5 million and a net loss of $5.9 million, a significant downturn from 2018 Selected Financial Data (2015-2019) (in thousands, except per share) | (in thousands, except per share) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $171,398 | $129,392 | $121,309 | $111,789 | $100,311 | | Operating (loss) income | $(5,514) | $9,486 | $11,863 | $9,188 | $4,583 | | Net (loss) income | $(5,943) | $20,188 | $6,595 | $8,058 | $7,082 | | Diluted net (loss) income per share | $(0.37) | $1.25 | $0.42 | $0.52 | $0.46 | | Total assets | $399,867 | $421,339 | $339,031 | $305,448 | $269,730 | | Current and long-term debt | $108,915 | $80,093 | $105,113 | $90,672 | $89,668 | Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2019, total revenues increased 32% to $171.4 million, driven by agribusiness, but an operating loss of $5.5 million resulted from a 55% surge in agribusiness costs and increased SG&A Results of Operations In FY2019, total net revenues increased 32% to $171.4 million, primarily from lemons, but total costs and expenses surged 48%, leading to an operating loss of $5.5 million and a net loss of $5.9 million Consolidated Results of Operations (FY2019 vs. FY2018) (in thousands) | (in thousands) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Total net revenues | $171,398 | $129,392 | 32% | | Total costs and expenses | $176,912 | $119,906 | 48% | | Operating (loss) income | $(5,514) | $9,486 | -158% | | Net (loss) income attributable to Limoneira | $(5,943) | $20,188 | -129% | Agribusiness Revenues by Crop (FY2019 vs. FY2018) (in thousands) | (in thousands) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Lemons | $149,971 | $103,830 | 44% | | Avocados | $5,391 | $6,576 | -18% | | Oranges | $6,022 | $8,884 | -32% | | Specialty citrus & other | $5,165 | $5,054 | 2% | | Total Agribusiness | $166,549 | $124,344 | 34% | Agribusiness Costs and Expenses (FY2019 vs. FY2018) (in thousands) | (in thousands) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Packing costs | $41,018 | $23,071 | 78% | | Harvest costs | $19,272 | $13,512 | 43% | | Growing costs | $26,962 | $23,523 | 15% | | Third-party grower costs | $57,497 | $31,733 | 81% | | Total Agribusiness Costs | $152,372 | $98,083 | 55% | Non-GAAP Reconciliation: Adjusted EBITDA (in thousands) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net (loss) income | $(5,943) | $20,188 | $6,595 | | EBITDA | $3,727 | $21,856 | $18,917 | | Adjusted EBITDA | $1,920 | $23,414 | $19,037 | Liquidity and Capital Resources The company's liquidity is primarily from operations and a $115.0 million credit facility, with net cash from operations decreasing to $1.4 million in FY2019, and waivers obtained for a debt service covenant non-compliance Cash Flow Summary (in thousands) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash from Operating Activities | $1,365 | $18,397 | $18,482 | | Net cash used in Investing Activities | $(23,654) | $(50,807) | $(26,416) | | Net cash from Financing Activities | $22,433 | $32,548 | $8,380 | - The company's primary sources of liquidity are cash from operations and its Farm Credit West Credit Facility, which provides aggregate borrowing capacity of $115.0 million[262][265] - As of October 31, 2019, outstanding borrowings under the Farm Credit West Credit Facility were $82.8 million, with $32.2 million of availability[267] - The company was not in compliance with its debt service coverage ratio covenant as of October 31, 2019, but received waivers from Farm Credit West and Wells Fargo[264] Critical Accounting Policies Key accounting policies include the adoption of ASU 2014-09 for revenue recognition, impacting brokered fruit sales, and capitalization of real estate development costs, with long-lived assets evaluated for impairment - On November 1, 2018, the company adopted ASU 2014-09 (Topic 606) for revenue recognition, which changed the accounting for certain brokered fruit sales from a net to a gross basis, increasing both reported revenues and costs by $8.8 million in FY2019 with no net effect on income[303][307] - Revenue from lemons is recognized when the customer takes control at the packinghouse, while revenue from crops sold to third-party packinghouses (like avocados to Calavo) is recognized upon delivery, net of packing and marketing charges[308][310] - The company capitalizes costs for planning, entitlement, and development of its real estate projects, with approximately $1.8 million of such costs capitalized in FY2019[318] - Long-lived assets, including real estate projects, are evaluated for impairment when events indicate the carrying value may not be recoverable, with impairment charges of $1.6 million and $0.1 million recorded in FY2018 and FY2017, respectively, but none in FY2019[324] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk from variable-rate debt, where a hypothetical 100 basis point increase would raise FY2019 interest expense by approximately $0.4 million - The company is exposed to interest rate risk from variable-rate borrowings under its Farm Credit West Credit Facility and Term Loans[328] - A 100 basis point increase in interest rates would increase interest expense by $0.4 million for fiscal year 2019 and decrease net income by $0.3 million[330] Financial Statements and Supplementary Data This section presents the company's consolidated financial statements for fiscal years 2017-2019, including balance sheets, income statements, cash flows, and detailed notes, along with management and auditor reports Consolidated Financial Statements The consolidated financial statements for fiscal years 2017-2019 include balance sheets showing total assets of $399.9 million in 2019, and statements of operations reflecting a net loss of $5.9 million in 2019 Consolidated Balance Sheet Highlights (as of Oct 31) (in thousands) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $35,070 | $31,044 | | Property, plant and equipment, net | $248,114 | $225,681 | | Real estate development | $17,602 | $107,162 | | Total assets | $399,867 | $421,339 | | Liabilities & Equity | | | | Total current liabilities | $31,664 | $27,074 | | Long-term debt, less current portion | $105,892 | $76,966 | | Total liabilities | $167,369 | $191,389 | | Total stockholders' equity | $221,688 | $219,140 | Consolidated Statement of Operations Highlights (Year Ended Oct 31) (in thousands) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total net revenues | $171,398 | $129,392 | $121,309 | | Operating (loss) income | $(5,514) | $9,486 | $11,863 | | Net (loss) income attributable to Limoneira | $(5,943) | $20,188 | $6,595 | Notes to Consolidated Financial Statements The notes detail significant transactions including avocado sales to Calavo, the $15.0 million acquisition of Trapani Fresh in Argentina, the $25.0 million Oxnard Lemon packinghouse acquisition, and the reclassification of real estate assets related to the East Area I joint venture - The company sells all of its avocado production to Calavo Growers, Inc. (Calavo), which accounted for sales of $3.1 million, $6.6 million, and $9.5 million in fiscal years 2019, 2018, and 2017, respectively[392][396] - In May 2019, the company acquired a 51% interest in Trapani Fresh (Argentina) for $15.0 million, adding $14.7 million in revenue and $1.0 million in net income from the acquisition date through October 31, 2019[483][484][485] - In July 2018, the company acquired the Oxnard Lemon packinghouse and related assets for $25.0 million and the San Pablo ranch in Chile for $13.1 million[478][486] - The East Area I real estate project is being developed via a joint venture (LLCB), and in December 2018, the company terminated its leaseback agreement, derecognized $58.3 million in real estate development assets, and reclassified $33.4 million to its equity method investment in the LLCB[506] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of October 31, 2019, excluding the recently acquired Trapani Fresh - Management concluded that the company's disclosure controls and procedures were effective as of October 31, 2019[652] - Management concluded that internal control over financial reporting was effective as of October 31, 2019, with the assessment excluding the newly acquired Trapani Fresh business[338][656] PART III This section incorporates by reference information regarding the company's directors, executive officers, corporate governance, executive compensation, security ownership, and related party transactions from the definitive Proxy Statement Directors, Executive Officers, Corporate Governance, Compensation, and Other Matters Information for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership, and related transactions, is incorporated by reference from the company's definitive Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive Proxy Statement[658] PART IV This section provides a comprehensive list of all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including officer certifications and material contracts Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including the consolidated financial statements and a detailed index of all exhibits - This section contains the list of financial statements and an index of all exhibits filed with the Form 10-K[665][666]