Limoneira CO annual report, FY2012

Limoneira Company 2012 Form 10-K Summary

Reporting period: Fiscal year ended October 31, 2012. The filing is an annual Form 10-K; it also provides fourth-quarter results for the three months ended October 31, 2012. Limoneira operates agribusiness, rental operations and real estate development businesses, primarily in California.

Business Context

Agribusiness includes lemon packing and sales, and production of lemons, avocados, oranges and specialty crops. It generated 93% of consolidated revenue in fiscal 2012.
Rental operations include residential and commercial properties, leased agricultural land and organic recycling; this segment generated 6% of revenue.
Real estate development includes approximately 2,000 planned or developing residential units and commercial development opportunities; this segment generated 1% of revenue.
The Company operated approximately 8,246 acres of land and had 226 employees at October 31, 2012.

Financial Results and Key Metrics

Metric	FY 2012	FY 2011	Change
Total revenue	$65.8 million	$52.5 million	+25%
Operating income	$4.6 million	$1.0 million	+351%
Net income	$3.2 million	$1.6 million	+97%
Net income applicable to common stock	$2.9 million	$1.3 million	+116%
Diluted earnings per common share	$0.26	$0.12	+117%
Net cash from operating activities	$6.3 million	$6.0 million	+5%
Adjusted EBITDA	$6.9 million	$6.3 million	+9%
Total assets	$172.6 million	$159.0 million	+9%
Current and long-term debt	$89.6 million	$82.9 million	+8%

Operating margin increased to approximately 6.9% from 1.9%; net margin was approximately 4.8% versus 3.0%; EBITDA margin was approximately 10.5%.
Agribusiness revenue increased 34% to $61.6 million, led by lemons at $44.2 million, avocados at $9.5 million, oranges at $4.1 million and specialty crops at $3.8 million.
Fresh lemon sales increased to $39.4 million on 2.4 million cartons, compared with $27.8 million on 1.8 million cartons in 2011. Average price increased to $16.42 per carton from $15.44.
Avocado revenue increased despite average pricing declining to $0.79 per pound from $1.60, because volume increased to 12.0 million pounds from 4.3 million pounds.
Fourth-quarter 2012 revenue was $14.8 million, operating income was $0.5 million and net income was $0.1 million, compared with fourth-quarter 2011 revenue of $10.9 million, operating income of $0.8 million and net income of $0.6 million.

Cash Flow, Liquidity and Capital Structure

Operating cash flow was $6.3 million. Investing activities used $11.3 million, primarily for capital expenditures, agricultural property acquisitions and a business acquisition.
Financing activities provided $4.9 million, including $6.8 million of net long-term borrowings, partially offset by $1.7 million of common and preferred dividends.
Cash was $11,000 at October 31, 2012, while total current assets were $9.4 million and current liabilities were $11.6 million.
The Rabobank revolving credit facility had $61.3 million outstanding and $25.7 million of availability at October 31, 2012. Its maturity was extended to June 2018 and borrowing capacity was increased to the lesser of $100 million or collateral-based availability.
Farm Credit West term loans and line of credit totaled approximately $28.3 million. Total debt included $48.3 million of variable-rate principal and $41.3 million of fixed-rate principal.
Interest-rate swaps fixed or are scheduled to fix rates on $42.0 million and $40.0 million of borrowings. Management estimated that a 1% increase in rates would raise fiscal 2013 interest expense by approximately $0.4 million.
Contractual obligations totaled $100.2 million, excluding projected interest payments of $22.1 million. The Company stated that operating cash flow and available borrowing capacity should fund fiscal 2013 requirements.

Material Changes Versus Fiscal 2011

Revenue growth was concentrated in agribusiness, especially lemons and avocados; rental revenue was broadly stable.
Real estate development revenue declined to $0.3 million from $2.5 million because fiscal 2011 included the sale of a luxury home. No real estate project sales occurred in fiscal 2012.
Agribusiness costs increased 34% to $47.3 million. Third-party grower costs more than doubled to $14.7 million as procured lemons represented 46% of cartons sold versus 33% in 2011.
Real estate development expenses fell 78% to $1.0 million. The Company recorded no real estate impairment in 2012, compared with $1.2 million in 2011.
SG&A increased 13% to $10.5 million, principally because of $1.0 million of employee incentive expense and higher selling costs.
The Company entered six leases covering approximately 1,000 acres at the Sheldon Ranch, acquired approximately 355 acres of agricultural property and began packing and marketing Arizona lemons, packing 157,000 cartons during fiscal 2012.
The common dividend rate increased 20% in September 2012 to $0.0375 per share quarterly. Fiscal 2012 common dividends totaled $0.13125 per share.

Guidance, Outlook, Risks and Unusual Items

Management expected Sheldon Ranch operations to become profitable in fiscal 2013 after a fiscal 2012 operating loss of approximately $0.7 million caused by timing of lease commencement and crop harvesting.
The Company expected fiscal 2013 operating cash flow and available credit capacity to satisfy capital expenditures, debt service, working capital and contractual obligations.
Management cited USDA expectations for a larger 2013 U.S. lemon crop, which could pressure lemon prices. It also expected ample California and Mexican avocado supplies to pressure avocado pricing.
Real estate development remains cautious because of weak housing markets, financing constraints, entitlement risks and possible future impairment charges. East Area I carried approximately $47.4 million of investment and requires final entitlement and annexation-related documentation.
Major operating risks include weather, drought and water availability, crop disease and pests, particularly Asian citrus psyllid and Huanglongbing, commodity and labor costs, perishability, customer concentration and competitive pricing.
The Company is dependent on Calavo for all avocado marketing and sales. Calavo accounted for $9.5 million of 2012 revenue, and Limoneira owned approximately 4.5% of Calavo.
The Company had a frozen defined-benefit pension plan with a $6.1 million funded-status deficit and contributed $1.3 million in fiscal 2012. It expected to contribute approximately $0.4 million in fiscal 2013.
Unusual or non-cash items included $0.7 million of derivative-related income, $0.9 million of stock compensation expense, $0.3 million of notes receivable write-offs and $1.3 million of pension contributions.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.

Investor Verification Checklist

Verify the sustainability of lemon volume and pricing growth, including the increasing proportion of third-party grower supply.
Assess avocado earnings sensitivity to alternating crop cycles and lower market prices.
Review debt maturities, variable-rate exposure, interest-rate swaps and compliance with the Rabobank debt-service covenant.
Evaluate whether fiscal 2013 cash flow can support capital expenditures, dividends, pension funding and required debt payments given minimal reported cash.
Monitor Sheldon Ranch profitability and the effect of its long-term lease and profit-sharing obligations.
Review entitlement, financing and impairment risks associated with East Area I, East Area II and other real estate projects.
Assess exposure to Asian citrus psyllid, Huanglongbing, drought, water restrictions and adverse weather.
Confirm the continuing dividend policy, including the Company’s statement that quarterly dividends are expected to remain similar to the fourth-quarter 2012 rate subject to financial results and other factors.