Limoneira Company — Q3 FY2011 Form 10-Q Summary
Business context and reporting period
Limoneira is a California-based agribusiness, rental operations and real estate development company. Its principal activities include growing and packing lemons, growing avocados, oranges and specialty crops, rental operations, and development of California real estate. The filing covers the unaudited three and nine months ended July 31, 2011, compared with the same periods in 2010. The company began marketing lemons directly to customers on November 1, 2010, while continuing to sell certain other citrus products through Sunkist.
Key financial metrics
| Metric | Q3 FY2011 | Q3 FY2010 | 9M FY2011 | 9M FY2010 |
|---|---|---|---|---|
| Total revenue | $23.2 million | $22.2 million | $41.6 million | $41.8 million |
| Operating income | $7.2 million | $9.0 million | $0.2 million | $5.2 million |
| Operating margin | 31.2% | 40.5% | 0.4% | 12.5% |
| Net income | $4.6 million | $4.9 million | $1.0 million | $1.9 million |
| Net income applicable to common stock | $4.6 million | $4.8 million | $0.8 million | $1.7 million |
| Diluted EPS | $0.41 | $0.43 | $0.08 | $0.15 |
| Adjusted EBITDA | $8.0 million | $10.1 million | $4.9 million | $8.0 million |
Q3 revenue increased 5%, but operating income declined 19% and adjusted EBITDA declined 21%. Nine-month revenue was essentially flat, while operating income fell 97% and net income declined 45%.
- Agribusiness revenue was $19.9 million in Q3 and $36.2 million for nine months, representing approximately 86% and 87% of total revenue, respectively.
- Q3 lemon revenue increased to $11.4 million from $10.7 million, primarily because of higher by-product prices. Fresh lemon sales were $10.5 million on 670,000 cartons, compared with $10.4 million on 573,000 cartons in the prior-year quarter.
- Q3 avocado revenue declined to $6.3 million from $7.7 million because of lower harvest volume. Nine-month avocado revenue declined to $6.7 million from $10.6 million.
- Real estate development revenue increased to $2.3 million in Q3 and $2.4 million for nine months, primarily from the sale of the Donna Circle property.
- Q3 agribusiness operating income declined to $9.4 million from $11.7 million. Nine-month agribusiness operating income declined to $8.4 million from $13.6 million.
- Real estate development generated operating losses of $0.3 million in Q3 and $2.0 million for nine months.
Cash flow, liquidity and debt
- Net cash provided by operating activities was $1.2 million for the nine months ended July 31, 2011, down from $2.1 million in the comparable period.
- Investing activities provided $0.03 million, compared with a $4.1 million use in the prior-year period. Significant transactions included $9.3 million of proceeds from the Rancho Refugio/Caldwell Ranch sale and $2.1 million from the Donna Circle sale, offset by $4.8 million of capital expenditures and the $6.5 million ranch acquisition cost.
- Financing activities used $1.5 million, compared with $1.6 million provided in the prior-year period. The company made $24.2 million of debt repayments and $24.0 million of new borrowings.
- Cash declined from $0.3 million at October 31, 2010 to $0.01 million at July 31, 2011. Current assets were $9.6 million against current liabilities of $8.2 million.
- Total debt was approximately $85.7 million, including $56.5 million outstanding under the Rabobank revolving credit facility and approximately $29.2 million under Farm Credit West facilities. Rabobank availability was approximately $23.5 million.
- The company had a $42.0 million interest-rate swap, fixing the related borrowing rate at approximately 5.13% through June 2013. The swap had a $2.6 million fair-value liability at July 31, 2011.
- Management stated that operating cash flow and available borrowing capacity were expected to be sufficient for capital expenditures, debt service, working capital and other obligations through the remainder of fiscal 2011.
Material changes, outlook and unusual items
- The company shifted lemon marketing from Sunkist to direct customer sales beginning November 1, 2010. This eliminated Sunkist sales and marketing fees but increased direct selling responsibilities and expenses.
- Real estate development assets increased to $71.3 million from $68.4 million at October 31, 2010. The company recorded $1.2 million of impairment charges for the nine months, including approximately $1.0 million related to Templeton Santa Barbara projects. Management noted that additional impairment charges could result from changes in market conditions, assumptions or valuations.
- The February 2011 Rancho Refugio/Caldwell Ranch transaction generated a $1.4 million gain and $2.8 million of net cash realized.
- The May 2011 Donna Circle sale generated $2.1 million of net cash proceeds after transaction costs. A $0.2 million impairment had been recorded before the sale.
- The company received a $0.6 million claim from Sunkist seeking repayment of fiscal 2010 lemon by-products revenue. Management believed the ultimate resolution would not materially affect the financial statements, but the matter remained under evaluation.
- The company filed an automatic shelf registration statement in August 2011 covering up to $100 million of common stock offerings; no offering had been completed under the registration as of the filing.
- The filing provides no formal earnings or revenue guidance. Management emphasized agricultural seasonality, with revenue generally peaking in the third quarter, and stated that California real estate market conditions remained challenging and that external capital would be needed over time to maximize development opportunities.
- Principal risks include weather and freezes, crop disease and pests, water availability and allocations, commodity prices, labor disruptions, energy costs, interest rates, financing availability, real estate market weakness, regulatory changes and international market conditions.
Important facts for investors to verify
- Whether the company can sustain adequate liquidity with only $10,000 of reported cash, substantial debt, and significant near-term maturities, including facilities due in 2013.
- The availability and covenant compliance of the Rabobank facility, including the annual debt-service coverage covenant.
- The effect of alternating avocado crop cycles, lemon pricing, fresh-market volumes and direct lemon marketing on future margins.
- The valuation and impairment risk associated with approximately $71.3 million of real estate development assets.
- The status and ultimate resolution of the $586,000 Sunkist claim.
- The future effect of variable-rate debt and the November 2011 conversion of the $9.0 million Windfall term loan from fixed to variable interest.
- The timing, pricing and dilution implications of any equity issuance under the $100 million shelf registration.
- The filing text does not provide a clear quantified amount of unused capacity under all Farm Credit West facilities or a complete forecast of fiscal 2011 operating results.