Limoneira CO annual report, FY2011

Limoneira Company 2011 Form 10-K Summary

Business context and reporting period

Limoneira Company is a California-based agribusiness and real estate development company. Its three segments are agribusiness, rental operations and real estate development. Agribusiness includes farming, lemon packing, marketing and sales; rental operations include residential and commercial rentals, leased land and organic recycling; and real estate development includes residential, commercial and agricultural development projects.

The filing covers the fiscal year ended October 31, 2011. The fourth quarter ended October 31, 2011 generated revenue of $10.9 million and net income of $554,000, but the filing primarily reports full-year results.

Financial performance and key metrics

Metric	FY 2011	FY 2010	Change
Total revenue	$52.5 million	$54.3 million	Down 3%
Operating income	$1.0 million	$3.1 million	Down $2.1 million
Net income	$1.6 million	$0.3 million	Up $1.3 million
Net income applicable to common stock	$1.3 million	$61,000	Improved
Basic and diluted EPS	$0.12	$0.01	Improved
EBITDA	$5.2 million	$6.2 million	Down $1.0 million
Adjusted EBITDA	$6.4 million	$8.6 million	Down $2.2 million
Net cash from operating activities	$6.0 million	$7.1 million	Down $1.1 million

Reported operating margin was approximately 1.9%, compared with approximately 5.8% in fiscal 2010. Net margin was approximately 3.0%, compared with approximately 0.6% in fiscal 2010. Adjusted EBITDA is a non-GAAP measure and excludes real estate impairment charges.

Segment revenue: Agribusiness revenue was $46.1 million, rental revenue was $3.9 million and real estate development revenue was $2.5 million.
Segment operating income: Agribusiness generated $10.9 million and rental operations generated $1.7 million. Real estate development produced a $2.3 million operating loss.
Crop performance: Lemon revenue rose 11% to $31.2 million, while avocado revenue fell 34% to $7.5 million because of lower production. Avocado revenue included a $551,000 crop insurance recovery.
Costs: Agribusiness costs increased 13% to $35.2 million, driven principally by higher packing costs and third-party grower costs.
Assets and equity: Total assets were $159.0 million and stockholders’ equity was $52.1 million at October 31, 2011.
Investment portfolio: The company held 665,000 Calavo Growers shares valued at $15.0 million, representing approximately 4.5% of Calavo’s outstanding shares.

Liquidity, debt and cash flow

Cash declined to $21,000 at October 31, 2011 from $262,000 one year earlier. Operating cash flow of $6.0 million and net proceeds from asset sales were more than offset by capital expenditures, debt repayments and dividends.

Total current and long-term debt was $82.9 million, down from $85.9 million in fiscal 2010.
The Rabobank revolving facility had $53.8 million outstanding and $26.2 million of availability at October 31, 2011. It carried interest at one-month LIBOR plus 1.50% and was subject to financial and other restrictive covenants.
Farm Credit West term loans and the non-revolving line of credit totaled approximately $29.1 million. The Farm Credit West line of credit included $13.0 million due in May 2013.
Approximately $42.0 million of debt was hedged through interest-rate swaps at a fixed rate of approximately 5.13%. The swap had a $2.4 million fair-value liability.
Capital expenditures were $12.9 million, including $4.5 million for real estate development and $6.5 million for the acquisition of Rancho Refugio/Caldwell Ranch.
Net financing cash outflow was $4.8 million, including $3.1 million of net debt repayments and $1.7 million of common and preferred dividends.
Contractual obligations totaled $95.3 million, including $82.9 million of debt principal and $12.4 million of operating lease obligations, excluding $24.0 million of estimated future debt interest.

Material changes versus the prior comparable period

Limoneira terminated its Sunkist license for lemons and began selling lemons directly to food service, wholesale and retail customers beginning November 1, 2010. Lemon revenue increased, but the change required higher selling and marketing costs.
Total revenue declined 3%, primarily because lower avocado production and lower real estate sales more than offset stronger lemon revenue.
Agribusiness operating income declined from $15.9 million to $10.9 million as costs increased faster than revenue.
Real estate development revenue declined from $3.3 million to $2.5 million following the sale of a lower-priced Arizona property. Impairment charges declined from $2.4 million to $1.2 million.
Selling, general and administrative expense declined 15% to $9.3 million, partly because fiscal 2010 included unusual public-company compliance costs and $1.3 million of charges related to executive notes receivable forgiveness.
Other income improved by $4.4 million, primarily due to a $1.4 million gain on the Rancho Refugio/Caldwell Ranch transaction and favorable derivative-related results.
The company sold Rancho Refugio/Caldwell Ranch after exercising a purchase option, generating $2.8 million of net cash and a $1.4 million gain. It also sold Donna Circle in Arizona for $2.1 million of net cash.

Guidance, outlook, commentary and risks

Management expected fiscal 2012 cash flows from operations and available credit capacity to fund working capital, capital expenditures, debt service and other obligations. The company stated that it could control the timing of investment spending if necessary.
Management expected higher avocado production in fiscal 2012 because of the crop’s alternate-bearing cycle. It also cited forecasts for lower 2012 U.S. lemon and orange crops, which could support prices, although increased avocado supply could pressure avocado prices.
In November 2011, Rabobank increased the revolving facility capacity from $80 million to up to $100 million subject to collateral value and extended maturity to June 30, 2018. Limoneira also entered into a forward swap fixing the rate on $40 million of borrowings at 4.30% beginning July 2013.
In January 2012, the company leased approximately 1,000 acres of orchards in Lindsay, California, with base rent of approximately $500,000 per year. The company expected no crop revenue from these orchards in fiscal 2012, with operations expected to contribute beginning in fiscal 2013.
East Area I had approximately $44 million invested and remained dependent on final annexation, entitlements, financing and real estate market conditions. Failure to obtain approvals or prolonged market weakness could result in additional impairment.
Key risks include weather, drought and water availability, crop disease and pests, including Asian Citrus Psyllid and Huanglongbing, commodity and labor costs, produce pricing and perishability, customer concentration through Calavo, interest-rate exposure, debt covenants, real estate market weakness and regulatory or litigation delays.
The company had an unfunded defined-benefit pension obligation of $5.5 million and expected to contribute approximately $833,000 to the plan in fiscal 2012.
At October 31, 2011, the company was in compliance with its Rabobank debt service coverage covenant. Failure to comply in future periods could trigger default, acceleration or loss of borrowing capacity.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective.

Important facts for investors to verify

Confirm the sustainability of direct lemon marketing, including customer retention, fresh-market utilization, pricing and incremental selling costs.
Evaluate normalized agribusiness profitability after adjusting for avocado crop cycles, crop insurance proceeds, unusual derivative gains and other nonrecurring items.
Review debt maturities, especially the $13.0 million Farm Credit West obligation due in May 2013, variable-rate exposure and compliance with financial covenants.
Assess whether real estate development carrying values, particularly East Area I, Templeton and Windfall Farms, remain recoverable given market conditions and approval requirements.
Monitor Asian Citrus Psyllid and Huanglongbing developments, water rights and availability, weather conditions and related crop-loss exposure.
Verify the valuation and liquidity of the $15.0 million Calavo investment and the company’s dependence on Calavo for all avocado sales.
Assess pension funding needs, operating lease commitments, related-party transactions and the settlement requiring 50% of future Fruit Growers Supply dividends to be assigned to Sunkist up to $586,000.