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EXCEL - IDEA: XBRL DOCUMENT - Limoneira COFinancial_Report.xls
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2011
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM              TO             
 
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
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 

 
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.    x  Yes    ¨  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).      x  Yes    ¨  No
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
¨   Large accelerated filer
¨  Accelerated filer
x  Non-accelerated filer
¨  Smaller reporting company
   
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
 
As of August 31, 2011, there were 11,205,241 shares outstanding of the registrant’s common stock.

 
 

 

LIMONEIRA COMPANY
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
4
   
Item 1.
Financial Statements (unaudited)
4
     
Consolidated Balance Sheets – July 31, 2011 and October 31, 2010
4
   
Consolidated Statements of Operations - three and nine months ended July 31, 2011 and 2010
5
   
Consolidated Statements of Comprehensive Income - three and nine months ended July 31, 2011 and 2010
6
   
Consolidated Statements of Cash Flows - nine months ended July 31, 2011 and 2010
7
   
Notes to Consolidated Financial Statements
10
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
     
Item 4.
Controls and Procedures
41
     
PART II. OTHER INFORMATION
42
   
Item 1.
Legal Proceedings
42
     
Item 1A.
Risk Factors
42
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
     
Item 3.
Defaults Upon Senior Securities
42
     
Item 4.
[Removed and Reserved]
42
     
Item 5.
Other Information
42
     
Item 6.
Exhibits
43
     
SIGNATURES
44

 
2

 

Cautionary Note on Forward-Looking Statements.
 
This Quarterly Report on Form 10-Q contains both historical and forward-looking statements.  Forward-looking statements in this 10-Q are subject to a number of risks and uncertainties, some of which are beyond the Company’s control.  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 include:
 
 
·
changes in laws, regulations, rules, quotas, tariffs and import laws;
 
 
·
weather conditions, including freezes 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 and current exchange rates;
 
 
·
availability of financing for land development activities;
 
 
·
political changes and economic crises;
 
 
·
international conflict;
 
 
·
acts of terrorism;
 
 
·
labor disruptions, strikes or work stoppages;
 
 
·
loss of important intellectual property rights; and
 
 
·
other factors disclosed in our public filings with the Securities and Exchange Commission.
 
The Company’s actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements.  Additional risks of which the Company is not currently aware or which the Company currently deems immaterial could also cause the Company’s actual results to differ, including those discussed in the section entitled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended October 31, 2010.  Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.  We undertake no obligation to update these forward-looking statements, even if our situation changes in the future.
 
The terms the “Company,” “we,” “our” and “us” as used throughout this Quarterly Report on Form 10-Q refer to Limoneira Company and its consolidated subsidiaries, unless otherwise indicated.

 
3

 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Limoneira Company and Subsidiaries
 
Consolidated Balance Sheets (unaudited)
 
 
   
July 31,
2011
   
October 31,
2010
 
Assets
           
Current assets:
           
Cash
 
$
10,000
   
$
262,000
 
Accounts receivable, net
   
7,166,000
     
3,393,000
 
Notes receivable – related parties
   
-
     
33,000
 
Notes receivable
   
-
     
161,000
 
Cultural costs
   
659,000
     
1,059,000
 
Prepaid expenses and other current assets
   
1,739,000
     
1,244,000
 
Income taxes receivable
   
-
     
1,241,000
 
Total current assets
   
9,574,000
     
7,393,000
 
Property, plant, and equipment, net
   
49,332,000
     
53,283,000
 
Real estate development
   
71,252,000
     
68,412,000
 
Equity in investments
   
8,853,000
     
9,057,000
 
Investment in Calavo Growers, Inc.
   
13,746,000
     
14,564,000
 
Notes receivable – related parties
   
92,000
     
60,000
 
Notes receivable
   
2,427,000
     
2,154,000
 
Other assets
   
4,671,000
     
4,515,000
 
Total assets
 
$
159,947,000
   
$
159,438,000
 
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable
 
$
3,195,000
   
$
2,031,000
 
Growers payable
   
1,679,000
     
871,000
 
Accrued liabilities
   
2,632,000
     
2,810,000
 
Current portion of long-term debt
   
645,000
     
626,000
 
Total current liabilities
   
8,151,000
     
6,338,000
 
Long-term liabilities:
               
Long-term debt, less current portion
   
85,086,000
     
85,312,000
 
Deferred income taxes
   
8,558,000
     
8,444,000
 
Other long-term liabilities
   
6,124,000
     
7,248,000
 
Total long-term liabilities
   
99,768,000
     
101,004,000
 
Commitments and contingencies
               
Stockholders’ equity:
               
Series B Convertible Preferred Stock – $100.00 par value (50,000 shares authorized: 30,000 shares issued and outstanding at July 31, 2011 and October 31, 2010) (8.75% coupon rate)
   
3,000,000
     
3,000,000
 
Series A Junior Participating Preferred Stock – $.01 par value (50,000 shares authorized: 0 issued or outstanding at July 31, 2011 and October 31, 2010)
   
-
     
-
 
Common Stock – $.01 par value (19,900,000 shares authorized:
               
11,205,241 and 11,194,460 shares issued and outstanding at July 31,
2011 and October 31, 2010, respectively)
   
112,000
     
112,000
 
Additional paid-in capital
   
34,704,000
     
34,735,000
 
Retained earnings
   
14,841,000
     
15,044,000
 
Accumulated other comprehensive loss
   
(629,000
)
   
(795,000
)
Total stockholders’ equity
   
52,028,000
     
52,096,000
 
Total liabilities and stockholders’ equity
 
$
159,947,000
   
$
159,438,000
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
4

 

Limoneira Company and Subsidiaries
 
Consolidated Statements of Operations (unaudited)
 
   
Three months ended
July 31,
   
Nine months ended
July 31,
 
                         
   
2011
   
2010
   
2011
   
2010
 
Revenues:
                       
Agribusiness
  $ 19,910,000     $ 21,215,000     $ 36,248,000     $ 38,689,000  
Rental
    978,000       964,000       2,944,000       2,881,000  
Real estate development
    2,314,000       51,000       2,421,000       231,000  
Total revenues
    23,202,000       22,230,000       41,613,000       41,801,000  
Costs and expenses:
                               
Agribusiness
    10,518,000       9,503,000       27,896,000       25,065,000  
Rental
    596,000       534,000       1,688,000       1,625,000  
Real estate development
    2,613,000       394,000       3,270,000       1,117,000  
Impairments of real estate development assets
    -       517,000       1,196,000       517,000  
Selling, general and administrative
   
2,226,000
      2,288,000      
7,396,000
      8,239,000  
Total costs and expenses
   
15,953,000
      13,236,000      
41,446,000
      36,563,000  
Operating income
   
7,249,000
      8,994,000      
167,000
      5,238,000  
Other income (expense):
                               
Interest expense
    (340,000 )     (437,000 )     (962,000 )     (1,256,000 )
Interest (expense) income from derivative instruments
    (87,000 )     (976,000 )     428,000       (1,540,000 )
Gain on sale of Rancho Refugio/Caldwell Ranch
    -       -       1,351,000       -  
Interest income
    28,000       27,000       84,000       85,000  
Other income (expense), net
    155,000       (16,000 )     458,000       336,000  
Total other income (expense)
    (244,000 )     (1,402,000 )     1,359,000       (2,375,000 )
Income before income tax provision and equity in (losses) earnings of investments
   
7,005,000
      7,592,000      
1,526,000
      2,863,000  
Income tax provision
   
(2,356,000
)     (2,704,000 )    
(447,000
    (1,043,000 )
Equity in (losses) earnings of investments
    (14,000 )     27,000       (35,000     75,000  
Net income
   
4,635,000
      4,915,000      
1,044,000
      1,895,000  
Preferred dividends
    (66,000 )     (66,000 )     (197,000     (197,000 )
Net income applicable to common stock
  $
4,569,000
    $ 4,849,000     $
847,000
    $ 1,698,000  
                                 
Basic net income per common share
  $
0.41
    $ 0.43     $ 0.08     $ 0.15  
 
                               
Diluted net income per common share
  $
0.41
    $ 0.43     $ 0.08     $ 0.15  
                                 
Dividends per common share
  $ 0.03     $ 0.03     $ 0.09     $ 0.09  
                                 
Weighted-average common shares outstanding-basic
    11,203,000       11,194,000       11,204,000       11,215,000  
Weighted-average common shares outstanding-diluted
    11,203,000       11,194,000       11,208,000       11,215,000  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
5

 

Limoneira Company and Subsidiaries
 
Consolidated Statements of Comprehensive Income (unaudited)
 
   
Three months ended
July 31,
   
Nine months ended
July 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income
  $ 4,635,000     $ 4,915,000     $ 1,044,000     $ 1,895,000  
Other comprehensive income, net of tax:
                               
Minimum pension liability adjustment
    135,000       94,000       405,000       282,000  
Unrealized holding (losses) gains on available-for-sale securities
    (132,000 )     1,513,000       (494,000 )     1,309,000  
Unrealized gains on derivative instruments
    81,000       166,000       255,000       260,000  
Total other comprehensive income, net of tax
    84,000       1,773,000       166,000       1,851,000  
Comprehensive income
  $ 4,719,000     $ 6,688,000     $ 1,210,000     $ 3,746,000  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
6

 

Limoneira Company and Subsidiaries
 
Consolidated Statements of Cash Flows (unaudited)
 
   
Nine months ended July 31,
   
2011
 
2010
 
Operating activities
           
Net income
 
$
1,044,000
   
$
1,895,000
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
1,661,000
     
1,724,000
 
Gain on sale of Rancho Refugio/Caldwell Ranch
   
(1,351,000
)
   
-
 
Impairments of real estate development assets
   
1,196,000
     
517,000
 
Loss on disposals/sales of assets
   
90,000
     
-
 
Stock compensation expense
   
643,000
     
405,000
 
Expense related to officers’ notes receivable forgiveness
   
-
     
687,000
 
Equity in losses (earnings) of investments
   
35,000
     
(75,000
)
Amortization of deferred financing costs
   
20,000
     
22,000
 
Non-cash interest (income) expense on derivative instruments
   
(428,000
)
   
1,540,000
 
Accrued interest on notes receivable
   
(69,000
)
   
(69,000
)
Donation of common stock
   
100,000
     
-
 
Changes in operating assets and liabilities:
               
Accounts and notes receivable
   
(4,545,000
)
   
(5,916,000
)
Cultural costs
   
400,000
     
160,000
 
Prepaid expenses and other current assets
   
(395,000
   
(216,000
)
Income taxes receivable
   
1,241,000
     
-
 
Other assets
   
(165,000
)
   
(67,000
)
Accounts payable and growers payable
   
1,585,000
     
(293,000
Accrued liabilities
   
(296,000
)
   
1,651,000
 
Other long-term liabilities
   
448,000
     
145,000
 
Net cash provided by operating activities
   
1,214,000
     
2,110,000
 
                 
Investing activities
               
Capital expenditures
   
(4,835,000
)
   
(4,105,000
)
Acquisition of Rancho Refugio/Caldwell Ranch
   
(6,510,000
)
   
-
 
Net proceeds from sale of Rancho Refugio/Caldwell Ranch
   
9,297,000
     
-
 
Net proceeds from sale of 6037 East Donna Circle, LLC
   
2,080,000
     
-
 
Cash distributions from equity investments
   
257,000
     
72,000
 
Equity investment contributions
   
(88,000
)
   
(17,000
)
Investments in water companies
   
(128,000
)
   
(109,000
)
Other
   
(43,000
)    
23,000
 
Net cash provided by (used in) investing activities
   
30,000
     
(4,136,000
)
                 
Financing activities
               
Borrowings of long-term debt
   
24,011,000
     
24,320,000
 
Repayments of long-term debt
   
(24,218,000
)
   
(21,430,000
)
Dividends paid – Common
   
(1,050,000
)
   
(1,052,000
)
Dividends paid – Preferred
   
(197,000
)
   
(197,000
)
Repurchase of common stock
   
(42,000
)
   
-
 
Other
   
-
     
(21,000
)
Net cash (used in) provided by financing activities
   
(1,496,000
   
1,620,000
 
                 
Net decrease in cash
   
(252,000
)
   
(406,000
)
Cash at beginning of period
   
262,000
     
607,000
 
Cash at end of period
 
$
10,000
   
$
201,000
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
7

 

Limoneira Company and Subsidiaries

Consolidated Statements of Cash Flows (unaudited) (continued)
 
   
Nine months ended July 31,
   
2011
   
2010
 
             
Supplemental disclosures of cash flow information
           
Cash paid during the period for interest
 
$
2,855,000
   
$
2,891,000
 
Cash paid during the period for income taxes, net of (refunds) received
 
$
(750,000
)
 
$
465,000
 
Non-cash investing and financing transactions:
               
Unrealized holding loss (gain) on investment in Calavo Growers, Inc.
 
$
818,000
   
$
(2,175,000
Exchange of stock on officers’ notes receivable forgiveness
 
$
-
   
$
1,228,000
 
Capital expenditures accrued but not paid at period-end
 
$
242,000
   
$
29,000
 
Accrued interest on note receivable
 
$
69,000
   
$
69,000
 
Donation of common stock
 
$
100,000
   
$
-
 
 
On November 15, 2009, the Company and Windfall, LLC (“Windfall”) entered into an agreement whereby Windfall irrevocably assigned to the Company its entire 85% interest in Windfall Investors, LLC (“Windfall Investors”).  In conjunction with obtaining Windfall's 85% interest in Windfall Investors, the Company agreed to release Windfall and its individual members from any and all liabilities including any losses with respect to Windfall’s previous interest in Windfall Investors and any secured and unsecured financing for Windfall Investors. The fair value of non-cash assets acquired and liabilities assumed at the date of the acquisition is summarized in Note 3.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
8

 

Limoneira Company and Subsidiaries

Consolidated Financial Statements (unaudited)

Preface

The preparation of the unaudited interim consolidated financial statements requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenue and expenses and certain financial statement disclosures. Actual results may differ from these estimates.
 
The unaudited interim consolidated financial statements for the three and nine months ended July 31, 2011 and 2010 and balance sheet as of July 31, 2011 included herein have not been audited by an independent registered public accounting firm, but in management’s  opinion, all adjustments (consisting of normal recurring adjustments) necessary to make a fair statement of the financial position at July 31, 2011 and the results of operations and the cash flows for the periods presented herein have been made. The results of operations for the three and nine months ended July 31, 2011 are not necessarily indicative of the operating results expected for the full fiscal year.

The consolidated balance sheet at October 31, 2010 included herein has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
 
The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission, or the SEC. Although we believe the disclosures made are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules or regulations. These unaudited interim consolidated financial statements should be read in conjunction with the October 31, 2010 consolidated financial statements and notes thereto included in the Company’s Form 10-K.

 
9

 

Limoneira Company and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited)

1. Business
 
Limoneira Company, a Delaware Company (the “Company”), engages primarily in growing citrus and avocados, picking and hauling citrus, packing lemons, and housing rentals and other leasing operations. The Company is also engaged in real estate development.
 
Prior to November 1, 2010, most of the Company’s citrus production had been marketed and sold under the Sunkist brand primarily through Sunkist Growers, Inc. (“Sunkist”), an agricultural marketing cooperative of which the Company is a member. As an agricultural cooperative, Sunkist coordinated the sales and marketing of the Company’s citrus products which are processed through the Company’s and other third-party packinghouses. Commencing November 1, 2010 the Company began marketing and selling its lemons directly to its foodservice, wholesale and retail customers throughout North America, Asia and other international markets. The Company continues to sell certain of its other citrus products to Sunkist.
 
The Company sells all 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. The Company’s avocados are packed by Calavo, sold and distributed under Calavo brands to its customers primarily in the United States and Canada.
 
The unaudited interim consolidated financial statements include the accounts of the Company and the accounts of all the subsidiaries and investments in which a controlling interest is held by the Company. The unaudited interim condensed financial statements represent the consolidated balance sheets, consolidated statement of operations, consolidated statement of comprehensive loss and consolidated statement of cash flows of Limoneira Company and its wholly-owned subsidiaries. The Company’s subsidiaries include: Limoneira Land Company, Limoneira Company International Division, LLC, Limoneira Mercantile, LLC, Windfall Investors, LLC and Templeton Santa Barbara, LLC.  All significant intercompany balances and transactions have been eliminated in consolidation. The Company considers the criteria established under FASB ASC 810, Consolidations, in its consolidation process.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Pronouncements

Financial Accounting Standards Board - Accounting Standards Update (“FASB ASU”) 2009-17, Consolidations (Topic 810).

This ASU replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, is the primary beneficiary and is required to consolidate a Variable Interest Entity (“VIE”) with a qualitative approach focused on identifying which enterprise has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the entity. In addition, ASU 2009-17 requires continuous assessments of whether an enterprise is the primary beneficiary of a VIE and requires enhanced disclosures about an enterprise’s involvement with a VIE. ASU 2009-17 was effective for the Company’s fiscal year beginning November 1, 2010 and as a result, the Company analyzed its variable interest in H.M. East Ridge, LLC (“East Ridge”). The Company determined that East Ridge is a VIE, but because the Company is not the primary beneficiary it is not required to consolidate East Ridge in its financial statements.

Recent Accounting Pronouncements

Financial Accounting Standards Board - Accounting Standards Update (“FASB ASU”) 2010-20, Receivables (Topic 310).
 
This ASU is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposure and evaluating the adequacy of its allowance for credit losses.  The ASU requires an entity to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in an entity’s portfolio of receivables, how the risk is analyzed in arriving at an allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. The ASU was issued July 2010 and is effective for interim and annual reporting periods beginning after June 15, 2011, as amended by ASU 2011-01. The Company does not expect the adoption of these provisions to have a significant effect on its consolidated financial statements.
 
 
10

 

Limoneira Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited) (continued)
 
2. Summary of Significant Accounting Policies (continued)

Financial Accounting Standards Board - Accounting Standards Update (“FASB ASU”) 2011-04, Fair Value Measurement (Topic 820).

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends ASC 820, Fair Value Measurement. The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s first quarter of fiscal year ending April 30, 2012. The Company does not expect the adoption of these provisions to have a significant effect on its consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the 2011 presentation. The significant reclassifications to the consolidated balance sheet as of October 31, 2010 were comprised of $161,000 of current assets of discontinued operations to notes receivable and $253,000 of non-current assets of discontinued operations to deferred income taxes. The significant reclassifications to the consolidated statements of operations of agribusiness costs to selling, general and administrative expenses for the three and nine months ended July 31, 2010 were $49,000 and $171,000, respectively.

3. Business Combination

In September 2005, the Company, along with Windfall, LLC (“Windfall”), formed a partnership, Windfall Investors, LLC (“Windfall Investors”). Windfall Investors purchased a 724-acre ranch in Creston, California (“Windfall Farms”) for $12,000,000 with the proceeds from loans provided by Farm Credit West (“FCW”). The Company and Windfall each made initial capital contributions to Windfall Investors of $300 (15% ownership interest) and $1,700 (85% ownership interest), respectively.

Prior to November 15, 2009, the Company had a variable interest in Windfall Investors (which was deemed to be a VIE). However, the Company was not required to consolidate Windfall Investors since the Company was not the primary beneficiary of Windfall Investors due to the Company not being required to absorb a majority of Windfall Investor’s expected losses or receive a majority of Windfall Investor’s expected residual returns. The Company accounted for its 15% ownership interest in Windfall Investors as an equity method investment since the Company had significant influence, but less than a controlling interest in Windfall Investors. The Company was also required to record a negative equity method investment balance (which was subsequently reclassified to other-long term liabilities) for Windfall Investors since the Company had previously guaranteed Windfall Investor’s outstanding indebtedness under its Term Loan and Revolving Line of Credit.

On November 15, 2009, the Company and Windfall entered into an agreement whereby Windfall irrevocably assigned to the Company its entire 85% interest in Windfall Investors. In conjunction with obtaining Windfall’s 85% interest in Windfall Investors, the Company agreed to release Windfall and its individual members from any and all liabilities including any losses with respect to Windfall’s previous interest in Windfall Investors and any secured and unsecured financing for Windfall Investors. The Company has accounted for its acquisition of Windfall’s 85% interest in Windfall Investors as a business combination under FASB ASC 805, Business Combinations.
 
 
11

 

Limoneira Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited) (continued)

3. Business Combination (continued)

The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of the acquisition. The Company obtained third-party valuations for the long-term assets acquired:


At November 15, 2009
 
Current assets
  $ 218,000  
Property, plant and equipment
    262,000  
Real estate development
    16,842,000  
Deferred income taxes
    345,000  
Other assets
    32,000  
Total assets acquired
    17,699,000  
         
Current liabilities
    (152,000 )
Current portion of long-term debt
    (10,141,000 )
Long-term debt, less current portion
    (9,148,000 )
Net liabilities assumed
  $ (1,742,000 )

The Company re-measured its previously held non-controlling equity interest in Windfall Investors to fair value on the November 15, 2009 acquisition date of Windfall Investors. The Company calculated that its acquisition date fair value of its previous equity interest in Windfall Investors was approximately $1,700,000. The Company did not recognize any gain or loss as a result of re-measuring the fair value equity interest held in Windfall Investors just prior to the business combination as the fair value approximated the carrying value of the non-controlling interest previously accounted for under the equity method of accounting.

4. Fair Value Measurements
 
Under the FASB ASC 820, Fair Value Measurement 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).
 
 
12

 

Limoneira Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited) (continued)

4. Fair Value Measurements (continued)

The following table sets forth the Company’s financial assets and liabilities as of July 31, 2011, that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets at fair value:
                       
Available- for -sale securities
 
$
13,746,000
   
$
 –
   
$
 –
   
$
13,746,000
 
Liabilities at fair value:
                               
Derivatives
 
$
   
$
2,597,000
   
$
   
$
2,597,000
 
 
Available-for-sale securities consist of marketable securities in Calavo common stock. The Company currently owns approximately 4.5% of Calavo’s outstanding common stock. These securities are measured at fair value by quoted market prices. Calavo’s stock price at July 31, 2011 and October 31, 2010 was $20.67 per share and $21.90 per share, respectively.
 
Derivatives consist of an interest rate swap, the fair value of which is estimated using industry-standard valuation models. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs.

5. Accounts Receivable

The Company grants credit in the course of its operations to customers, 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 certain other factors. At July 31, 2011 and October 31, 2010 the allowances totaled $122,000.

The Company’s primary concentration of credit risk at July 31, 2011 consists of $2,591,000 due from Calavo for its purchase of avocados which was paid in August 2011. The Company sells all of its avocado production to Calavo.
 
6. Real Estate Development Assets
 
Real estate development assets consist of the following:
 
 
   
July 31, 
2011
   
October 31,
2010
 
East Areas 1 and 2
 
$
43,344,000
   
$
 40,401,000
 
Templeton Santa Barbara, LLC    
9,325,000
     
10,318,000
 
Windfall Investors, LLC
   
18,583,000
     
17,693,000
 
Total included in real estate development assets
 
$
71,252,000
   
$
 68,412,000
 
 
East Areas 1 and 2
 
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. During the three months ended July 31, 2011 and 2010, the Company capitalized $945,000 and $605,000, respectively, of costs related to these projects. During the nine months ended July 31, 2011 and 2010, the Company capitalized $2,943,000 and $1,937,000, respectively, of costs related to these projects. Additionally, in relation to these projects, the Company has incurred net expenses of $14,000 and $16,000 in the three months ended July 31, 2011 and 2010, respectively, and $70,000 and $41,000 in the nine months ended July 31, 2011 and 2010, respectively.
 
 
13

 

Limoneira Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited) (continued)

6. Real Estate Development Assets (continued)
 
Templeton Santa Barbara, LLC
 
The four real estate development parcels within the Templeton Santa Barbara, LLC project (“Templeton Project”) are described as Centennial Square (“Centennial”), The Terraces at Pacific Crest (“Pacific Crest”), Sevilla and East Ridge. The carrying value of Centennial at July 31, 2011 was $2,433,000, net of a second quarter 2011 impairment charge of $261,000. The carrying value of Pacific Crest at July 31, 2011 was $2,800,000, net of a second quarter 2011 impairment charge of $336,000. The carrying value of Sevilla at July 31, 2011 was $4,092,000, net of a second quarter 2011 impairment charge of $396,000. The fiscal year 2011 impairment charges were based on results from independent appraisals which indicated that the fair values of the projects were less than the carrying values.
 
During the three months ended July 31, 2011 and 2010, the Company capitalized zero costs related to these real estate development projects. During the nine months ended July 31, 2011 and 2010, the Company capitalized zero and $208,000, respectively, of costs related to these real estate development projects. Additionally, in relation to these projects, the Company has incurred net expenses of $62,000 and $89,000 in the three months ended July 31, 2011 and 2010, respectively, and $179,000 and $206,000 in the nine months ended July 31, 2011 and 2010, respectively.

In February 2010, the Company and HM Manager, LLC formed a limited liability company, HM East Ridge, LLC (“East Ridge”), for the purpose of developing the East Ridge parcel. The Company’s initial capital contribution into East Ridge was the land parcel with a net carrying value of $7,207,000. The Company has made $88,000 of cash contributions to East Ridge during the nine months ended July 31, 2011 for property taxes. Since the Company has significant influence on, but less than a controlling interest in, East Ridge, the Company is accounting for its investment in East Ridge using the equity method of accounting and the investment is included in equity in investments in the Company’s July 31, 2011 and October 31, 2010 consolidated balance sheets.

Windfall Investors, LLC

On November 15, 2009, the Company acquired Windfall Investors as described in Note 3, which included $16,842,000 of real estate development assets. During the three months ended July 31, 2011 and 2010, the Company capitalized $360,000 and $323,000, respectively, of costs related to this real estate development project. During the nine months ended July 31, 2011 and 2010, the Company capitalized $890,000 and $554,000, respectively, of costs related to this real estate development project. Additionally, in relation to this project, the Company has incurred net expenses of $216,000 and $244,000, in the three months ended July 31, 2011 and 2010, respectively, and $568,000 and $640,000 in the nine months ended July 31, 2011 and 2010, respectively.
 
Arizona Development Projects

In fiscal year 2007, the Company and Bellagio Builders, LLC, an Arizona limited liability company, formed a limited liability company, 6037 East Donna Circle, LLC (“Donna Circle”), with the sole purpose of constructing and marketing an approximately 7,500 square foot luxury home in Paradise Valley, Arizona. In fiscal year 2009, Donna Circle was completed, and the Company executed a two-year lease agreement for the property with a third party. This lease agreement expired in March 2011.

In May 2011, the Company sold the Donna Circle property for $2,275,000 cash, realizing net cash of $2,080,000 after selling and other transaction costs. The carrying value of the property at the time of the sale was $2,080,000, net of a second quarter 2011 impairment charge of $203,000. The impairment charge was the result of a decrease in the selling price which indicated that the fair value of the Donna Circle property was less than its carrying value.

 
14

 

Limoneira Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited) (continued)

7. Investment in Calavo Growers, Inc.
 
In June 2005, the Company entered into a stock purchase agreement with Calavo. Pursuant to this agreement, the Company purchased 1,000,000 shares, or approximately 6.9%, of Calavo’s common stock for $10,000,000 and Calavo purchased 1,728,570 shares, or approximately 15.1%, of the Company’s common stock for $23,450,000. Under the terms of the agreement, the Company received net cash consideration of $13,450,000. In fiscal year 2009, the Company sold 335,000 shares of Calavo stock for a total of $6,079,000, recognizing a gain of $2,729,000. The Company has classified its marketable securities investment as available-for-sale.
 
The changes in the fair value of the available-for-sale securities result in unrealized holding gains or losses for the remaining shares held by the Company.  In the three and nine months ended July 31, 2011, the Company recorded total unrealized holding losses of $219,000 and $818,000, respectively, due to the change in the market value of the Company’s remaining 665,000 shares of Calavo common stock at July 31, 2011. In the three and nine months ended July 31, 2010, the Company recorded total unrealized holding gains of $2,514,000 and $2,175,000, respectively, due to the change in the market value of the Company’s remaining 665,000 shares of Calavo common stock at July 31, 2010. 

8. Notes Receivable
 
In connection with the Company’s stock grant program, the Company has recorded total notes receivable and accrued interest from related parties of $92,000 and $93,000 at July 31, 2011 and October 31, 2010, respectively. Interest income on notes receivable from related parties was not significant during the three and nine month periods ended July 31, 2011 and 2010.
 
In connection with the 2004 sale of a parcel of land in Morro Bay, California, the Company has recorded a note receivable and accrued interest from the buyer of $1,857,000 and $1,804,000 at July 31, 2011 and October 31, 2010, respectively. Interest income was $23,000 for each of the three months periods ended July 31, 2011 and 2010. Interest income was $69,000 for each of the nine month periods ended July 31, 2011 and 2010. The note is secured by a deed of trust and is subordinate to bank financing on the property. During July 2011, the Company and the buyer agreed to extend the due date for the note from April 2014 to April 2020 and to convert the interest rate from a fixed rate of 7.0% to a floating rate of LIBOR plus 3.5% with a floor of 6.0%. The note provides for repayment, which is subordinate to the bank financing, that is based on a percentage of net operating cash flows of the underlying orchard as defined in the note, ranging from 35% through 2014 and 50% until repaid or the due date. The note and accrued interest is being recorded in noncurrent notes receivable in the Company’s consolidated balance sheets.
 
 
15

 

Limoneira Company and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited) (continued)
 
9. Long-Term Debt
 
Long-term debt is comprised of the following:
 
   
July 31, 
2011
   
October 31,
2010
 
Rabobank revolving credit facility secured by property with a net book value of $12,260,000 at
July 31, 2011 and October 31, 2010. The interest rate is variable based on the one-month
London Interbank Offered Rate (LIBOR), which was 0.19% at July 31, 2011 plus 1.50%.
Interest is payable monthly and the principal is due in full in June 2013.
  $ 56,503,000     $ 56,952,000  
                 
Farm Credit West term loan secured by property with a net book value of $11,641,000 at
July 31, 2011 and $11,650,000 at October 31, 2010. The interest rate is variable and was
3.25% at July 31, 2011. The loan is payable in quarterly installments through November 2022.
    6,322,000       6,658,000  
                 
Farm Credit West term loan secured by property with a net book value of $11,641,000 at
   July 31, 2011 and $11,650,000 at October 31, 2010. The interest rate is variable and was
 3.25% at July 31, 2011. The loan is payable in monthly installments through May 2032.
    900,000       922,000  
                 
Farm Credit West non-revolving line of credit secured by property with a net book value of $3,832,000 at July 31, 2011 and $3,814,000 at October 31, 2010. The interest rate is variable and was 3.50% at July 31, 2011. Interest is payable monthly and the principal is due in full in May 2013.
    12,966,000       12,257,000  
                 
Farm Credit West term loan secured by property with a net book value of $18,583,000 at
    July 31, 2011 and $17,693,000 at October 31, 2010. The interest rate is fixed at 6.73% until November 2011, becoming variable for the remainder of the loan. The loan is payable in monthly installments through October 2035.
    9,040,000       9,149,000  
                 
Subtotal
    85,731,000       85,938,000  
Less current portion
    645,000       626,000  
Total long-term debt, less current portion
  $ 85,086,000     $ 85,312,000  
 
In November 2009, the Company assumed the long-term debt of Windfall Investors, LLC with the acquisition of the business (see Note 3). The debt is held by Farm Credit West and consists of a secured long-term loan with an original principal balance of $9,750,000 and a revolving line of credit of $10,500,000. At the time of the acquisition, there was a total of $19,289,000 outstanding under the term loan and the revolving line of credit. The due date for the revolving line of credit was originally November 2009 and was extended until June 2010. In May 2010, the Company refinanced the outstanding line of credit balance of $10,500,000 plus accrued interest on a long-term basis through the establishment of a $13,000,000 non-revolving line of credit with Farm Credit West that expires in May 2013. The Company incurred $21,000 of costs with Farm Credit West for this refinancing. Such costs were capitalized and are being amortized using the straight-line method over the term of the credit agreement.

 
16

 

Limoneira Company and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited) (continued)
 
10. Derivative Instruments and Hedging Activities
 
The Company enters into interest rate swaps to minimize the risks and costs associated with its financing activities. Derivative financial instruments are as follows:
 
   
Notional Amount
   
Fair Value Net Liability
 
   
July 31,
2011
   
October 31,
2010
   
July 31,
2011
   
October 31,
2010
 
Pay fixed-rate, receive floating-rate interest rate swap, maturing June 2013
 
$
42,000,000
   
$
42,000,000
   
$
2,597,000
   
$
3,450,000
 
 
In April 2010, the Company cancelled two interest rate swaps with notional amounts of $10,000,000 each and amended the remaining interest rate swap from a notional amount of $22,000,000 to a notional amount of $42,000,000. This remaining interest rate swap was also amended to a pay-fixed rate of 3.63%, which is 62 basis points lower than the original pay-fixed rate. The receive floating-rate and maturity date of the amended interest rate swap remain unchanged. The Company did not incur any out-of-pocket fees related to the cancellation or amendment of these interest rate swaps.

These interest rate swaps previously qualified as cash flow hedges and were accounted for as hedges under the short-cut method. On the amendment date of the swap agreements, the fair value liability and the related accumulated other comprehensive loss balance was $2,015,000.  The accumulated other comprehensive loss balance is being amortized and included in interest income (expense) from derivative instruments over the remaining period of the original swap agreements. Amortization for the three and nine month periods ended July 31, 2011 was $136,000 and $425,000, respectively. Amortization for the three and nine months ended July 31, 2010 was $276,000. The remaining accumulated other comprehensive loss balance is $1,039,000, net of amortization of $976,000 at July 31, 2011.

As a result of the re-negotiated terms of the derivatives above, the remaining interest rate swap with a notional amount of $42,000,000 no longer qualified for hedge accounting as of April 30, 2010.  Therefore, mark to market adjustments to the underlying fair value liability are being recorded in interest income (expense) from derivative instruments and the net liability balance continues to be recorded in other long-term liabilities in the Company’s consolidated balance sheets. The mark to market adjustments recognized by the Company during the three and nine month periods ended July 31, 2011 resulted in non-cash interest income of $49,000 and $853,000, respectively. The mark to market adjustments recognized by the Company during the three and nine month periods ended July 31, 2010 resulted in non-cash interest expense of $700,000 and $1,264,000, respectively.
 
11. Basic and Diluted Net Income per Share

Basic net income per common share is calculated using the weighted-average number of common shares outstanding during the period without consideration of the dilutive effect of stock-based compensation. Diluted net income per common share is calculated using the weighted-average number of common shares outstanding plus the dilutive effect of stock-based compensation calculated using the treasury stock method. Diluted weighted-average shares were zero for the three months periods ended July 31, 2011 and 2010 and 4,000 and zero for the nine months ended July 31, 2011 and 2010, respectively. The Series B convertible preferred shares are anti-dilutive.

12. Related-Party Transactions

The Company rents certain of its residential housing assets to employees. The Company recorded $119,000 and $121,000 of rental income from employees in the three months ended July 31, 2011 and 2010, respectively. The Company recorded $381,000 and $388,000 of rental income from employees in the nine months ended July 31, 2011 and 2010, respectively. There were no rental payments due from employees at July 31, 2011 and October 31, 2010.

The Company has representation on the boards of directors of the mutual water companies in which the Company has investments. The Company purchased water and water delivery services from such mutual water companies, in aggregate, of $131,000 and $130,000 in the three months ended July 31, 2011 and 2010, respectively. The Company purchased water and water delivery services from such mutual water companies, in aggregate, of $531,000 and $445,000 in the nine months ended July 31, 2011 and 2010, respectively. Such amounts are included in agribusiness expense in the Company’s consolidated statements of operations. Water payments due to the mutual water companies were, in aggregate, $54,000 and $49,000 at July 31, 2011 and October 31, 2010, respectively, and are included in accounts payable in the Company’s consolidated balance sheets.
 
 
17

 

Limoneira Company and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited) (continued)

12. Related-Party Transactions (continued)

The Company has a presence 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 of $474,000 and $362,000 from the association in the three months ended July 31, 2011 and 2010, respectively. The Company purchased services and supplies of $951,000 and $839,000 from the association in the nine months ended July 31, 2011 and 2010, respectively. Such amounts are included in agribusiness expense in the Company’s consolidated statements of operations. Payments due to the association were $41,000 and $69,000 at July 31, 2011 and October 31, 2010, respectively, and are included in accounts payable in the Company’s consolidated balance sheets.

The Company has invested $300,000 in the career of Charlie Kimball, an IndyCar Series race car driver, who is related to a member of the Company’s Board of Directors. The Company exercised repayment options in fiscal year 2010, whereby $200,000 of the total $300,000 of investment is to be repaid no later than August 2011 and is included in prepaid expenses and other current assets at July 31, 2011 and October 31, 2010. Included in other assets in the Company’s consolidated balance sheets is the long-term investment of $100,000 at October 31, 2010. The Company exercised its repayment option in January 2011 whereby the remaining $100,000 of the investment is to be repaid no later than January 2012. This balance is included in the prepaid expense and other current assets at July 31, 2011. The Company received $200,000 during August 2011.

The Company has periodically enlisted the services of a general contractor who is related to a member of management. The general contractor provided services of zero and $116,000 during the three months ended July 31, 2011 and 2010, respectively. The general contractor provided services of zero and $299,000 during the nine months ended July 31, 2011 and 2010, respectively. Payments due to the general contractor were zero and $62,000 at July 31, 2011 and October 31, 2010, respectively, and are included in accounts payable in the Company’s consolidated balance sheets.

In the nine months ended July 31, 2011 and 2010, the Company recorded dividend income of $366,000 and $333,000, respectively, on its investment in Calavo, which is included in other income (expense), net in the Company’s consolidated statements of operations. The Company sold avocados to Calavo totaling $6,299,000 and $7,682,000 for the three months ended July 31, 2011 and 2010, respectively, and $6,674,000 and $10,561,000 for the nine months ended July 31, 2011 and 2010, respectively. Such amounts are included in agribusiness revenues in the Company’s consolidated statements of operations. There was $2,591,000 receivable by the Company from Calavo at July 31, 2011 and no amounts were receivable at October 31, 2010. Additionally, the Company leases office space to Calavo and received rental income of $65,000 and $57,000 in the three month periods ended July 31, 2011 and 2010, respectively. The Company received rental income from Calavo of $187,000 and $171,000 in the nine month periods ended July 31, 2011 and 2010, respectively. Such amounts are included in rental revenues in the Company’s consolidated statements of operations.
 
13. Income Taxes

The Company’s projected annual effective tax rate for fiscal year 2011 is approximately 34.3%. As such, a 33.7% effective tax rate, after certain discrete items, was utilized by the Company for the third quarter of fiscal year 2011 to calculate its income tax provision.
 
There has been no material change to the Company’s uncertain tax position for the three and nine month periods ended July 31, 2011. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.  The Company has not accrued any interest and penalties associated with uncertain tax positions as of July 31, 2011 and October 31, 2010.

 
18

 

Limoneira Company and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited) (continued)

14. Retirement Plans
 
Effective December 31, 1991, the Company merged the Limoneira Hourly and Piece Rated Pension Plan and its salaried plan, into the Sunkist Retirement Plan, Plan L (the “Plan”). All participants became members of the Plan at that time, and all assets became part of the Sunkist Retirement Plan L Trust. The Plan is administered by City National Bank and Mercer Human Resource Consulting.
 
The Plan is a noncontributory, defined benefit, single employer pension plan, which provides retirement benefits for all eligible employees of the Company. Since Limoneira Company’s Defined Benefit Pension Plan is a single employer plan within the Sunkist Master Trust, its liability was not commingled with that of the other plans holding assets in the Master Trust. Limoneira Company has an undivided interest in its assets. Benefits paid by the Plan are calculated based on years of service, highest five-year average earnings, primary Social Security benefit, and retirement age.
 
The Plan is funded consistent with the funding requirements of federal law and regulations. There were funding contributions of $228,000 and $300,000 during the nine month periods ended July 31, 2011 and 2010, respectively. 
 
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 periodic benefit cost.
 
The net periodic pension costs for the Company’s Defined Benefit Pension Plan for the three months ended July 31 were as follows:
 
   
2011
   
2010
 
             
Service cost
 
$
37,000
   
$
 37,000
 
Interest cost
   
213,000
     
210,000
 
Expected return on plan assets
   
(248,000
)
   
(255,000
)
Recognized actuarial loss
   
224,000
     
156,000
 
Net periodic pension cost
 
$
226,000
   
$
148,000
 

The net periodic pension costs for the Company’s Defined Benefit Pension Plan for the nine months ended July 31 were as follows:
 
   
2011
   
2010
 
             
Service cost
 
$
 111,000
   
$
 111,000
 
Interest cost
   
638,000
     
630,000
 
Expected return on plan assets
   
(745,000
)
   
(764,000
)
Recognized actuarial loss
   
673,000
     
469,000
 
Net periodic pension cost
 
$
677,000
   
$
446,000
 

 
19

 

Limoneira Company and Subsidiaries
 
Notes to Consolidated Financial Statements (unaudited) (continued)

15. Stockholders’ Equity

As of July 31, 2011, there are 15,310 shares of common stock issued to employees in connection with a discontinued stock option plan. Such shares are subject to repurchase by the Company with an estimated repurchase price value of $28,000 at July 31, 2011. The Company has determined that the terms of the shares outstanding subject to repurchase constitute a liability due to the repurchase right. In March 2011, the Company repurchased 36,120 shares for approximately $42,000 in accordance with this repurchase obligation. Additionally, reductions of stock-based compensation of approximately $4,000 and $82,000 were recorded in the nine month periods ended July 31, 2011 and 2010, respectively, to reflect the fair value of the repurchase obligation. The repurchase obligation of $28,000 and $74,000 is included in other long-term liabilities in the Company’s consolidated balance sheets at July 31, 2011 and October 31, 2010, respectively.
 
In connection with the Company’s stock-based compensation plans, $1,519,000 of notes receivable from three officers of the Company were included in “current notes receivable – related parties” in the Company’s consolidated balance sheet at October 31, 2009. In December 2009, the officers’ notes receivable and accrued interest were reduced by $1,020,000 through the exchange of 6,756 shares of Company stock with a fair market value of $150.98 per share (at the date of the exchange) that were held by the officers of the Company.  The remaining officers’ notes receivable and accrued interest of $687,000 was forgiven by the Company resulting in compensation expense recorded in the nine months ended July 31, 2010.  The Company also recognized compensation expense of $603,000 during the nine months ended July 31, 2010 representing additional compensation paid by the Company to the officers relating to the officers’ payroll taxes on the notes receivable forgiveness.

In December 2009, the Company issued new notes to the officers totaling $208,000 in connection with payments made by the Company on behalf of the officers for payroll taxes associated with the vesting of shares under the Company’s stock-based compensation plans. The $208,000 note receivable balance was subsequently reduced to zero through the exchange of 1,400 shares of Company stock with a fair market value of approximately $149.00 per share (at the date of the exchange) that were held by the officers of the Company.

In December 2010, members of management exchanged 17,709 shares of Company stock with a fair market value of $27.76 per share (at the date of the exchange) for the payment of payroll taxes associated with the vesting of shares under the Company’s stock-based compensation plans.

In January 2011, 62,287 shares of common stock were issued to management under the Company’s stock-based compensation plans for fiscal year 2010 financial performance. This resulted in total compensation expense of approximately $1,773,000, with $591,000 recognized in the year-ended October 31, 2010 and the balance to be recognized equally over the next two years as the shares vest. The Company recognized $140,000 and $118,000 of stock-based compensation to management during the three months ended July 31, 2011 and 2010, respectively. The Company recognized $467,000 and $352,000 of stock-based compensation to management during the nine months ended July 31, 2011 and 2010, respectively.

In January 2011, management exchanged 9,871 shares with a fair market value of $28.40 per share (at the date of the exchange) for the payment of payroll taxes associated with the January 2011 stock issuance. In February 2011, management exchanged 217 shares with a fair market value of $22.56 per share (at the date of the exchange) for the payment of payroll taxes in connection with the January 2011 stock issuance.

In January 2011, 7,983 shares of common stock were granted to the Company’s non-employee directors under the Company’s stock-based compensation plans for fiscal year 2011 compensation. The Company recognized zero and $45,000 of stock-based compensation to non-employee directors during the three months ended July 31, 2011 and 2010, respectively. The Company recognized $180,000 and $135,000 of stock-based compensation to non-employee directors during the nine months ended July 31, 2011 and 2010, respectively.

On June 30, 2011, the Company donated common stock to the Museum of Ventura County (“the Museum”), a California non-profit corporation, which donation was comprised of 4,427 unregistered shares of the Company’s common stock with a per share value of $22.59 on the donation date, or an aggregate of approximately $100,000.  The Museum intends to establish and operate an agriculture museum in Santa Paula, California depicting the history of agriculture in Ventura County.  The value of the donation is included in selling, general and administrative expense in the accompanying consolidated statements of operations.
 
 
20

 

Limoneira Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited) (continued)

16. Segment Information
 
The Company operates in three reportable operating segments: agribusiness, rental operations, and real estate development. The reportable operating segments of the Company are strategic business units with different products and services, distribution processes and customer bases. The agribusiness segment includes farming and lemon packing operations. The rental operations segment includes residential and commercial rental operations, leased land, and organic recycling. The real estate development segment includes real estate development operations. The Company measures operating performance, including revenues and earnings, of its operating segments and allocates resources based on its evaluation. The Company does not allocate selling, general and administrative expense, other income (expense), interest expense, income tax expense and assets or liabilities, or specifically identify them to its operating segments.

Segment information for the three months ended July 31, 2011:
 
   
Agribusiness
   
Rental
Operations
   
Real Estate
Development
   
Corporate
and Other
   
Total
 
                               
Revenues
 
$
19,910,000
   
$
978,000
   
$
2,314,000
   
$
 –
   
$
23,202,000
 
Costs and expenses
   
10,518,000
     
596,000
     
2,613,000
     
2,226,000
     
15,953,000
 
Operating income (loss)
 
$
9,392,000
   
$
382,000
   
$
(299,000
)
 
$
(2,226,000
)
 
$
7,249,000
 
 
Segment information for the three months ended July 31, 2010:

   
Agribusiness
   
Rental
Operations
   
Real Estate
Development
   
Corporate 
and Other
   
Total
 
                               
Revenues
 
$
 21,215,000
   
$
 964,000
   
$
 51,000
   
$
 –
   
$
 22,230,000
 
Costs and expenses
   
9,503,000
     
534,000
     
394,000
     
2,288,000
     
12,719,000
 
Impairment of real estate assets
   
     
     
517,000
     
     
517,000
 
Operating income (loss)
 
$
11,712,000
   
$
430,000
   
$
(860,000
)
 
$
(2,288,000
)
 
$
8,994,000
 

The following table sets forth revenues by category, by segment for the three months ended:
   
July 31, 
2011
   
July 31, 
2010
 
Agribusiness:
           
Lemons
 
$
11,447,000
   
$
 10,711,000
 
Avocados
   
6,299,000
     
7,682,000
 
Navel and Valencia oranges
   
1,537,000
     
1,805,000
 
Specialty citrus and other crops
   
627,000
     
1,017,000
 
Agribusiness revenues
   
19,910,000
     
21,215,000
 
                 
Rental operations: 
               
Residential and commercial
   
546,000
     
537,000
 
Leased land
   
379,000
     
375,000
 
Organic recycling
   
53,000
     
52,000
 
Rental operations revenues
   
978,000
     
964,000
 
                 
Real estate development revenues
   
2,314,000
     
51,000
 
Total revenues
 
$
23,202,000
   
$
 22,230,000
 
 
 
21

 

Limoneira Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited) (continued)

16. Segment Information (continued)

Segment information for the nine months ended July 31, 2011:
 
   
Agribusiness
   
Rental
Operations
   
Real Estate
Development
   
Corporate
and Other
   
Total
 
                               
Revenues
 
$
36,248,000
   
$
2,944,000
   
$
2,421,000
   
$
 –
   
$
41,613,000
 
Costs and expenses
   
27,896,000
     
1,688,000
     
3,270,000
     
7,396,000
     
40,250,000
 
Impairment of real estate assets
   
     
     
1,196,000
     
     
1,196,000
 
Operating income (loss)
 
$
8,352,000
   
$
1,256,000
   
$
(2,045,000
)
 
$
(7,396,000
)
 
$
167,000
 
 
Segment information for the nine months ended July 31, 2010:
 
   
Agribusiness
   
Rental
Operations
   
Real Estate
Development
   
Corporate
and Other
   
Total
 
                               
Revenues
 
$
 38,689,000
   
$
2,881,000
   
$
 231,000
   
$
 –
   
$
 41,801,000
 
Costs and expenses
   
25,065,000
     
1,625,000
     
1,117,000
     
8,239,000
     
36,046,000
 
Impairment of real estate assets
   
     
     
517,000
     
     
517,000
 
Operating income (loss)
 
$
13,624,000
   
$
1,256,000
   
$
(1,403,000
)
 
$
(8,239,000
)
 
$
5,238,000
 
 
The following table sets forth revenues by category, by segment for the nine months ended:
 
   
July 31,
2011
   
July 31,
2010
 
Agribusiness: 
               
Lemons
 
$
23,355,000
   
$
21,975,000
 
Avocados
   
6,674,000
     
10,561,000
 
Navel and Valencia oranges
   
3,330,000
     
3,376,000
 
Specialty citrus and other crops
   
2,889,000
     
2,777,000
 
Agribusiness revenues
   
36,248,000
     
38,689,000
 
                 
Rental operations: 
               
Residential and commercial
   
1,661,000
     
1,608,000
 
Leased land
   
1,140,000
     
1,126,000
 
Organic recycling
   
143,000
     
147,000
 
Rental operations revenues
   
2,944,000
     
2,881,000
 
                 
Real estate development revenues
   
2,421,000
     
231,000
 
Total revenues
 
$
41,613,000
   
$
 41,801,000
 
 
 
22

 

Limoneira Company and Subsidiaries

Notes to Consolidated Financial Statements (unaudited) (continued)

17. Sale of Rancho Refugio/Caldwell Ranch

On February 3, 2011, the Company completed the exercise of the purchase option contained in its lease of the Rancho Refugio/Caldwell Ranch, which allowed the Company to acquire the property for a purchase price of $6,510,000. Concurrently with the close of its purchase option, the Company sold the property for $10,000,000 to Rancho Guacamole, LLC, a California limited liability company. The gain on the sale was $1,351,000, net of the $6,510,000 purchase price, $1,436,000 remaining capitalized in leasehold improvements and $703,000 of selling and transaction costs. The net cash realized from the transaction was $2,787,000.
 
18. Contingencies

During July 2011, the Company received a claim from Sunkist requesting a $586,000 refund of fiscal year 2010 lemon by-products revenue. Sunkist offered to settle the claim through the assignment by the Company of future dividends the Company receives from Fruit Growers Supply in an amount equal to the claim. The Company has been allocated approximately $1,293,000 in future dividends by Fruit Growers Supply. Such dividends are not recognized by the Company as income until received, as payment requires annual approval by the board of directors of Fruit Growers Supply. The Company is evaluating the claim and believes the ultimate resolution of the matter will not have a material impact on its consolidated financial statements.
 
19. Subsequent Events

The Company has evaluated events subsequent to July 31, 2011 to assess the need for potential recognition or disclosure in this Quarterly Report on Form 10-Q.  Based upon this evaluation, no subsequent events occurred that require recognition or disclosure in the unaudited consolidated financial statements.

 
23

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Limoneira Company was incorporated in Delaware in 1990 as the successor to several businesses with operations in California since 1893.  We are an agribusiness, rental operations and real estate development company founded and based in Santa Paula, California, committed to responsibly using and managing our approximately 6,850 acres of land, water resources and other assets to maximize long-term shareholder value.  Our current operations consist of fruit production and marketing, real estate development 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, the largest grower 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 and Tulare counties in California, which plantings consist of approximately 1,750 acres of lemons, 1,250 acres of avocados, 1,060 acres of oranges and 400 acres of specialty citrus and other crops.  We also operate our own packinghouse in Santa Paula, California, where we process and pack lemons that we grow, as well as lemons grown by others.
 
Our water resources include water rights, usage 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, Santa Barbara and Paso Robles Basins (aquifers).  We also use ground water and water from local water districts in Tulare County, which is in the San Joaquin Valley.

For more than 100 years, we have been making strategic investments in California agribusiness and development real estate. We currently have six active real estate development projects in California.  Our real estate developments range from apartments to single-family homes and include approximately 200 completed units and another approximately 2,000 units in various stages of planning and development.

Business Segment Summary

We have three business segments: agribusiness, rental operations and real estate development. Our agribusiness segment currently generates the majority of our revenue from its farming and lemon packing operations; our rental operations segment generates revenue from our housing, organic recycling and commercial and leased land operations and our real estate development segment generates revenue from the sale of real estate development projects. Generally, we see the Company as a land and farming company that generates annual cash flows to support its progress into diversified real estate development activities.  As real estate development projects are monetized, our agribusiness will then be able to expand more rapidly into new regions and markets.

Agribusiness

 
We are one of the largest growers of lemons and the largest grower of avocados in the United States and, as a result, our agribusiness segment is the largest of our three segments, representing approximately 87% of our consolidated revenues for the nine months ended July 31, 2011, and 87%, 89% and 93% of our fiscal year 2010, 2009 and 2008 consolidated revenues, respectively.  Prior to November 1, 2010, our lemons were primarily marketed by Sunkist, with the vast majority of our domestic lemon and specialty citrus orders processed through the Sunkist network.  On November 1, 2010, we began marketing and selling our lemons directly to our food service, wholesale and retail customers throughout North America, Asia and certain other international markets. Our other citrus products continue to be processed and sold through Sunkist and another third-party packinghouse.

During the three months ended July 31, 2011, total lemon sales of approximately $11.4 million were comprised of approximately $10.4 million (93%) in domestic sales, $1.0 million (7%) in sales to domestic exporters and zero in international sales. During the nine months ended July 31, 2011, total lemon sales of approximately $23.4 million were comprised of approximately $19.2 million (82%) in domestic sales, $3.7 million (16%) in sales to domestic exporters and $0.5 million (2%) in international sales.

Historically, our agricultural operations have been seasonal in nature with the least amount of our annual revenue being generated in our first quarter, increasing in the second quarter, peaking in the third quarter and declining in the fourth quarter. Growing costs in our agribusiness segment tend to be higher in the first and second quarters and lower in the third and fourth quarters because of the timing of expensing cultural costs in the current year that were inventoried in the prior year. Our harvest costs generally increase in the second quarter and peak in the third quarter coinciding with the increasing production and revenue.
 
 
24

 

Fluctuations in price are a function of global supply and demand with weather conditions, such as unusually low or high temperatures, typically having the most dramatic effect on the amount of lemons supplied in any individual growing season.  We believe we have a competitive advantage by operating our own lemon packing operation, even though a significant portion of the costs related to our lemon packing operations are fixed.  As a result, cost per carton is a function of fruit throughput.  While we regularly monitor our costs for redundancies and opportunities for cost reductions, we also supplement the number of lemons we pack in our packinghouse with additional lemons from third-party growers.  Because the fresh utilization rate for our lemons, or the percentage of lemons we harvest and pack that go to the fresh market, is directly related to the quality of lemons we pack and, consequently, the price we receive per 40-pound box, we only pack lemons from third-party growers if we determine their lemons are of high quality.

Our avocado producing business is important to us yet nevertheless faces some constraints on growth as there is little additional land that can be cost-effectively acquired to support new avocado orchards in Southern California.  Also, avocado production is cyclical as avocados typically bear fruit on a bi-annual basis with large crops in one year followed by smaller crops the next year.  While our avocado production remains volatile, the profitability and cash flow realized from our avocados frequently offsets occasional losses in other crops we grow and helps to diversify our fruit production base.

In addition to growing lemons and avocados, we also grow oranges and specialty citrus and other crops, typically utilizing land not suitable for growing high quality lemons.  We regularly monitor the demand for the fruit we grow in the ever-changing marketplace to identify trends.  For instance, while per capita consumption of oranges in the United States has been decreasing since 2000 primarily as a result of consumers increasing their consumption of mandarin oranges and other specialty citrus, the international market demand for U.S. oranges has increased.  As a result, we have focused our orange production on high quality late season Navel and Valencia oranges primarily for export to Japan, China and South Korea, which are typically highly profitable niche markets.  We produce our specialty citrus and other crops in response to consumer trends we identify and believe that we are a leader in the niche production and sale of certain of these high margin fruits.  Because we carefully monitor the respective markets of specialty citrus and other crops, we believe that demand for the types and varieties of specialty citrus and other crops that we grow will continue to increase throughout the world.
 
Rental Operations

Our rental operations segment represented approximately 7% of our consolidated revenues for the nine months ended July 31, 2011, and 7%, 11% and 7% of our fiscal year 2010, 2009 and 2008 consolidated revenues, respectively.  Our rental housing units generate reliable cash flows which we use to partially fund the operations of all three of our business segments, and provide affordable housing to many of our employees, including our agribusiness employees, a unique employment benefit that helps us maintain a dependable, long-term employee base.  In addition, our leased land business provides us with a typically profitable diversification.  Revenue from our rental operations segment is generally level throughout the year.

Real Estate Development

Our real estate development segment represented 6% of our consolidated revenues for the nine months ended July 31, 2011, 6% of our fiscal year 2010 consolidated revenues and did not generate any significant revenues in fiscal year 2009 or 2008. We recognize that long-term strategies are required for successful real estate development activities.  We plan to redeploy any financial gains into other income producing real estate as well as additional agricultural properties.

Recent Developments

On February 3, 2011, we completed the exercise of the purchase option contained in our lease of the Rancho Refugio/Caldwell Ranch, which allowed us to acquire the property for a purchase price of $6,510,000. Concurrently with the close of our purchase option, we sold the property for $10,000,000 to Rancho Guacamole, LLC, a California limited liability company. The gain on the sale was $1,351,000, net of the $6,510,000 purchase price, $1,436,000 remaining capitalized in leasehold improvements and $703,000 of selling and transaction costs. The net cash realized from the transaction was $2,787,000.

In March 2011, the Ventura County Local Area Formation Committee (“LAFCO”) approved conditions that will allow for the annexation and incorporation of East Area 1 into the City of Santa Paula. Per the Pre-Annexation and Development Agreement between the City of Santa Paula and the Company, a $500,000 Development Agreement Contribution was made to the City of Santa Paula and was capitalized as a cost of this real estate development project.

On June 28, 2011, we declared a $0.03125 per share dividend paid on July 15, 2011 in the aggregate amount of $350,000 to common shareholders of record on July 11, 2011.
 
 
25

 
 
In May 2011, we sold our Donna Circle property for $2,275,000 cash, realizing net cash of $2,080,000 after selling and other transaction costs. The carrying value of the property at April 30, 2011 was $2,080,000, net of a second quarter 2011 impairment charge of $203,000. The impairment charge was the result of a decrease in the selling price which indicated that the fair value of the Donna Circle property was less than its carrying value at April 30, 2011. The property was classified as property, plant and equipment at October 31, 2010.

In August 2011, we filed a Registration Statement on Form S-3 with the United States Securities and Exchange Commission in accordance with the Securities Act of 1933, as amended. Utilizing a “shelf” registration process, we registered common stock, par value $0.01 per share, which may be offered and sold in one or more offerings at indeterminate prices for a maximum aggregate offering price of up to $100,000,000.
 
Results of Operations

The following table shows the results of operations for the three and nine months ended July 31, 2011 and 2010:
 
   
Quarter Ended July 31,
   
Nine Months Ended July 31,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues:
                       
Agribusiness
  $ 19,910,000     $ 21,215,000     $ 36,248,000     $ 38,689,000  
Rental
    978,000       964,000       2,944,000       2,881,000  
Real estate development
    2,314,000       51,000       2,421,000       231,000  
Total revenues
    23,202,000       22,230,000       41,613,000       41,801,000  
Costs and expenses:
                               
Agribusiness
    10,518,000       9,503,000       27,896,000       25,065,000  
Rental
    596,000       534,000       1,688,000       1,625,000  
Real estate development
    2,613,000       394,000       3,270,000       1,117,000  
Impairments of real estate development assets
    -       517,000       1,196,000       517,000  
Selling, general and administrative
   
2,226,000
      2,288,000      
7,396,000
      8,239,000  
Total costs and expenses
   
15,953,000
      13,236,000      
41,446,000
      36,563,000  
Operating income:
                               
Agribusiness
    9,392,000       11,712,000       8,352,000        13,624,000  
Rental
    382,000       430,000       1,256,000       1,256,000  
Real estate development
    (299,000 )     (860,000 )     (2,045,000 )     (1,403,000 )
Selling, general and administrative
   
(2,226,000
)     (2,288,000 )    
(7,396,000
)     (8,239,000 )
Operating income
   
7,249,000
      8,994,000      
167,000
      5,238,000  
Other income (expense):
                               
Interest expense
    (340,000 )     (437,000 )     (962,000     (1,256,000 )
Interest income (expense) from derivative instruments
    (87,000 )     (976,000 )     428,000       (1,540,000 )
Gain on sale of Rancho Refugio/Caldwell Ranch
    -       -       1,351,000       -  
Interest income and other
    183,000       11,000       542,000       421,000  
Total other income (expense)
    (244,000 )     (1,402,000 )     1,359,000       (2,375,000 )
Income tax provision
   
(2,356,000
)     (2,704,000 )    
(447,000
)     (1,043,000 )
Equity in (losses) earnings of investments
    (14,000 )     27,000       (35,000 )     75,000  
Net income
  $
4,635,000
    $ 4,915,000     $
1,044,000
    $ 1,895,000  
 
 
26

 

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 expense, income taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA, which excludes impairments on real estate development assets, is an important measure to evaluate our results of operations between periods on a more comparable basis.  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 the Company and may not be consistent with methodologies used by other companies.  EBITDA and adjusted EBITDA are summarized and reconciled to net income which management considers to be the most directly comparable financial measure calculated and presented in accordance with GAAP as follows:
 
   
Quarter ended July 31,
 
Nine Months Ended July 31,
     
2011
     
2010
     
2011
     
2010
 
Net income
 
 $
4,635,000
   
 $
4,915,000
   
 $
1,044,000
   
 $
1,895,000
 
    Total interest expense, net
   
427,000
     
1,413,000
     
534,000
     
2,796,000
 
    Income taxes
   
2,356,000
     
2,704,000
     
447,000
     
1,043,000
 
    Depreciation and amortization
   
561,000
     
566,000
     
1,661,000
     
1,724,000
 
EBITDA
   
7,979,000
     
9,598,000
     
3,686,000
     
7,458,000
 
    Impairments of real estate development assets
   
-
     
517,000
     
1,196,000
     
517,000
 
Adjusted EBITDA
 
$
7,979,000
   
$
10,115,000
   
$
4,882,000
   
$
7,975,000
 

Third Quarter Fiscal Year 2011 Compared to Third Quarter Fiscal Year 2010

Revenues

Total revenue for the third quarter of fiscal year 2011 was $23.3 million compared to $22.2 million for the third quarter of fiscal year 2010. The 5% increase of $1.1 million was primarily the result of increased real estate development revenues, partially offset by a decrease in agricultural revenues, as detailed below:
 
 
·  
Real estate revenues for the third quarter of fiscal year 2011 were $2.3 million compared to $0.1 million for the third quarter of fiscal year 2010. The $2.2 million increase was primarily due to the sale of our Donna Circle property in Arizona.
 
 
·  
Lemon revenue for the third quarter of fiscal year 2011 was $11.4 million compared to $10.7 million for the third quarter of fiscal year 2010. The $0.7 million increase was primarily a result of increased sales prices for lemon by-products in fiscal year 2011. In the third quarter of fiscal year 2011, $0.9 million of lemon by-products were sold at an average per ton price of $185 compared to $0.3 million sold at an average per ton price of $35 in the third quarter of fiscal year 2010. Additionally, during the three months ended July 31, 2011 and 2010, fresh lemon sales were $10.5 million and $10.4 million, respectively, on 670,000 and 573,000 cartons of lemons sold at average per carton prices of $15.67 and $18.15.

 
·  
Avocado revenue for the third quarter of fiscal year 2011 was $6.3 million compared to $7.7 million for the third quarter of fiscal year 2010. The $1.4 million decrease was primarily due to decreased harvest volume in fiscal year 2011. The California avocado crop typically experiences alternating years of high and low production due to plant physiology and fiscal year 2010 produced an especially high volume of avocados with 17.7 million pounds in the full year. In the third quarter of fiscal year 2011, 3.8 million pounds of avocados were harvested and sold at an average price per pound of $1.66 compared to 12.4 million pounds of avocados harvested and sold at an average price per pound of $0.62 in the third quarter of fiscal year 2010.

 
·  
Navel and Valencia orange revenues for the third quarter of fiscal year 2011 were $1.5 million compared to $1.8 million for the third quarter of fiscal year 2011. The $0.3 million decrease was primarily due to decreased harvest volume in the third quarter of fiscal year 2011 compared to the third quarter of fiscal year 2010.

 
·  
Specialty citrus and other crop revenues for the third quarter of fiscal year 2011 were $0.6 million compared to $1.0 million for the third quarter of fiscal year 2010. The $0.4 million decrease was primarily due to decreased harvest volume in the third quarter of fiscal year 2011 compared to the third quarter of fiscal year 2010.
 
 
27

 

Costs and Expenses

Total costs and expenses for the third quarter of fiscal year 2011 were $16.0 million compared to $13.2 million for the third quarter of fiscal year 2010, for a 21% increase of $2.8 million. Of this increase, $1.0 million was attributable to increases in our agribusiness costs and $2.2 million was attributable to real estate development costs. These increases were offset by a $0.5 million decrease in impairments of real estate development assets.

Agribusiness costs include packing costs, harvest costs, growing costs, costs related to the lemons we process and sell for third-party growers and depreciation expense.  These costs are discussed further below:
 
 
·  
Packing costs during the third quarter of fiscal year 2011 were $3.0 million compared to $2.6 million in the third quarter of fiscal year 2010. This 15% increase of $0.4 million is primarily attributable to increased lemon sales volume in fiscal year 2011. We packed and sold 670,000 cartons of lemons in the third quarter of fiscal year 2011 compared to 573,000 cartons in the same period of fiscal year 2010. Packing costs per carton sold were $4.48 and $4.54 for the third quarter of fiscal year 2011 and 2010, respectively. Partially offsetting the increased costs from higher volume, there were no fees paid to Sunkist for sales and marketing services in the third quarter of fiscal year 2011 compared to $0.3 million of fees in the third quarter of fiscal year 2010. This is due to our decision to market and sell lemons directly to our customers beginning in fiscal year 2011.

 
·  
Harvest costs for the third quarter of fiscal year 2011 were $2.0 million compared to $3.0 million for the third quarter of fiscal year 2010. This 33% decrease of $1.0 million primarily resulted from lower harvest volume of avocados in the third quarter of fiscal year 2011 compared to the third quarter of fiscal year 2010.

 
·  
Growing costs for the third quarter of fiscal year 2011 were $3.4 million compared to $2.9 million for the third quarter of fiscal year 2010. The $0.5 million increase was primarily due to increased costs for fertilization and expenses related to orchard redevelopment.

 
·  
Costs related to the lemons we process and sell for third-party growers were $1.6 million in the third quarter of fiscal year 2011 compared to $0.6 million in the third quarter of fiscal year 2010. The $1.0 million increase was attributable to a higher percentage of third-party grower lemons relative to the total volume of cartons sold, which directly correlates to amounts expensed and paid to third-party growers.

Real estate development costs for the third quarter of fiscal year 2011 were $2.6 million compared to $0.4 million for the third quarter of fiscal year 2010. The $2.2 million increase is primarily due to costs on the sale of our Donna Circle property in Arizona. Offsetting this increase, there were no impairments of real estate development assets in the third quarter of fiscal year 2011 compared to a $0.5 million impairment recognized in the same period in fiscal year 2010.

Other Income/Expense

Other income/expense for the third quarter of fiscal year 2011 was $0.2 million of expense compared to $1.4 million of expense for the third quarter of fiscal year 2010. The $1.2 million decrease in expense is primarily due to a $0.2 million reimbursement for a 1995 water distribution project and fair value adjustments on our interest rate swap.

Income Taxes
 
We recorded an estimated income tax provision of $2.4 million in the third quarter of fiscal year 2011 on pre-tax earnings of $7.0 million compared to an estimated income tax provision of $2.7 million on pre-tax earnings of $7.6 million in the third quarter of fiscal year 2010.

Our projected annual effective tax rate for fiscal year 2011 is 34.3% at July 31, 2011, resulting in a 33.7% effective tax rate, after certain discrete items, for the third quarter of fiscal year 2011. In comparison, our projected annual effective tax rate was 36.8% at July 31, 2010, resulting in a 35.5% effective tax rate, after certain discrete items, for the third quarter of fiscal year 2010.
 
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Nine Months Ended July 31, 2011 Compared to the Nine Months Ended July 31, 2010
 
Revenues

Total revenue for the nine months ended July 31, 2011 was $41.6 million compared to $41.8 million for the nine months ended July 31, 2010. The decrease of $0.2 million was primarily the result of decreased agricultural revenues partially offset by an increase in real estate development revenues, as detailed below:

 
·  
Lemon revenue was $23.4 million for the nine months ended July 31, 2011 compared to $22.0 million for the nine months ended July 31, 2010. The $1.4 million increase was primarily a result of increased sales prices for lemon by-products in fiscal year 2011. In the nine months of fiscal year 2011, $2.1 million of lemon by-products were sold at an average per ton price of $184 compared to $0.5 million sold at an average per ton price of $35 in the nine months of fiscal year 2010. Offsetting this increase, during the nine months ended July 31, 2011 and 2010 fresh lemon sales were $21.3 million and $21.5 million, respectively, on 1,431,000 and 1,173,000 cartons of lemons sold at average per carton prices of $14.88 and $18.33, respectively.

 
·  
Avocado revenue for the nine months ended July 31, 2011 was $6.7 million compared to $10.6 million for the nine months ended July 31, 2010. The $3.9 million decrease was primarily due to decreased harvest volumes in the nine months ended July 31, 2011. The California avocado crop typically experiences alternating years of high and low production due to plant physiology, and fiscal year 2010 produced an especially high volume of avocados with 18.8 million pounds in the full year. In the nine months ended July 31, 2011, 4.2 million pounds of avocados were harvested and sold at an average price per pound of $1.60 compared to 16.5 million pounds of avocados harvested and sold at an average price per pound of $0.64 during the same period in fiscal year 2010.

 
·  
Navel and Valencia orange revenues for the nine months ended July 31, 2011 were $3.3 million compared to $3.4 million for the nine months ended July 31, 2010. The $0.1 million decrease was primarily due to decreased harvest volume during the nine months ended July 31, 2011 compared to the same period in fiscal year 2010.

 
·  
Specialty citrus and other crop revenues in the nine months ended July 31, 2011 were $2.9 million compared to $2.8 million in the nine months ended July 31, 2010. The $0.1 million increase was primarily due to higher prices for fruit sold during fiscal year 2011 compared to fiscal year 2010.

 
·  
Real estate development revenues for the nine months ended July 31, 2011 were $2.4 million compared to $0.2 million for the nine months ended July 31, 2010. The $2.2 million increase was primarily due to the sale of our Donna Circle property in Arizona.

Costs and Expenses
 
Total costs and expenses for the nine months ended July 31, 2011 were $41.4 million compared to $36.6 million for the nine months ended July 31, 2010, for a 13% increase of $4.8 million. Of this increase, $2.8 million was attributable to increases in our agribusiness costs, $2.2 million was attributable to increases in our real estate development costs and $0.7 million was attributable to an increase in impairments of real estate development assets. These increases were partially offset by a $0.8 million decrease in selling, general and administrative expenses.

Agribusiness costs include packing costs, harvest costs, growing costs, costs related to the lemons we process and sell for third-party growers and depreciation expense.  These costs are discussed further below:

 
·  
Packing costs during the nine months ended July 31, 2011 were $7.6 million compared to $6.2 million in the same period of fiscal year 2010. This 23% increase of $1.4 million is primarily attributable to increased lemon sales volume in the nine months ended July 31, 2011. We packed and sold 1,431,000 cartons of lemons in the nine months of fiscal year 2011 compared to 1,173,000 cartons in the same period of fiscal year 2010. Packing costs per carton sold were $5.31 and $5.29 for the nine months ended July 31, 2011 and 2010, respectively. Partially offsetting the increased costs from higher volume, there were no fees paid to Sunkist for sales and marketing services in the nine months ended July 31, 2011 compared to $0.7 million of fees for the same period in fiscal year 2010. This is due to our decision to market and sell lemons directly to our customers beginning in fiscal year 2011.
 
 
29

 
 
 
·  
Harvest costs for the nine months ended July 31, 2011 were $4.9 million compared to $5.7 million in the same period of fiscal year 2010. This 14% decrease of $0.8 million primarily resulted from lower harvest volumes of avocados in the nine months of fiscal year 2011 compared to the nine months of fiscal year 2010. In the nine months ended July 31, 2011, 4.2 million pounds of avocados were harvested compared to 16.5 million pounds of avocados harvested during the same period in fiscal year 2010.
 
 
·  
Growing costs during the nine months ended July 31, 2011 were $8.3 million compared to $7.7 million in the same period of fiscal year 2010. This 8% increase of $0.6 million was primarily due to increased amortization of inventoried cultural costs, and increased costs for fertilization and expenses related to orchard redevelopment.

 
·  
Costs related to the lemons we process and sell for third-party growers were $5.9 million in the nine months of fiscal year 2011 compared to $4.3 million in the nine months of fiscal year 2010. The 37% increase of $1.6 million was attributable to a higher percentage of third-party grower lemons relative to the total volume of cartons sold, which directly correlates to amounts expensed and paid to third-party growers.

Real estate development costs for the nine months ended July 31, 2011 were $3.3 million compared to $1.1 million for the nine months ended July 31, 2010. The increase of $2.2 million is primarily due to costs on the sale of our Donna Circle property in Arizona. Additionally, impairments of real estate development assets during the nine months ended July 31, 2011 were $1.2 million compared to $0.5 million in the same period in fiscal year 2010. The fiscal year 2011 impairments reflect $1.0 million of write-downs related to our Templeton Santa Barbara, LLC projects. There were no impairments of these projects during the nine months ended July 31, 2010.

Selling, general and administrative expenses for the nine months ended July 31, 2011 were $7.4 million compared to $8.2 million for the nine months ended July 31, 2010. This 10% decrease of $0.8 million was primarily attributable to the following:

 
·  
We incurred a $1.3 million charge associated with the forgiveness of notes receivable from three of our senior executive officers in the nine months of fiscal year 2010. There was no such charge in the nine months of fiscal year 2011.

 
·  
We incurred incremental costs of $1.3 million during the nine months of fiscal year 2010 associated with the filing of our Form 10 and our compliance with other obligations associated with the Securities Exchange Act of 1934. Comparatively, there were $0.5 million of costs associated with our compliance with obligations associated with the Securities Exchange Act of 1934 during the nine months of fiscal year 2011.

 
·  
The decreases noted above were partially offset by a $0.4 million increase in selling expenses due to our decision to market and sell lemons directly to our customers beginning in fiscal year 2011. In years prior to fiscal 2011, when we operated under the Sunkist license agreement, Sunkist provided certain sales and marketing services for which it charged a service fee that was included in packing costs and was $0.7 million during the nine months ended July 31, 2010.

 
·  
Additionally, the decreases noted above were partially offset by $0.3 million of additional labor and benefits due to an increase in salaries and personnel associated with being a publicly traded company, $0.2 million increase in stock grant expenses due to final vesting of 2008 stock grants and added vesting of 2010 stock grants and $0.4 million of net increases in other selling, general and administrative costs.

Other Income/Expense
 
Other income (expense) for the nine months ended July 31, 2011 was $1.4 million of income compared to $2.4 million of expense for the nine months ended July 31, 2010. The $3.8 million increase in net other income is primarily due to a $1.4 million gain on the February 2011 sale of Rancho Refugio/Caldwell Ranch, a $0.2 million reimbursement for a 1995 water distribution project and fair value adjustments on our interest rate swap.

Income Taxes

We recorded an estimated income tax provision of $0.4 million in the nine months ended July 31, 2011 on pre-tax earnings of $1.5 million compared to an estimated income tax provision of $1.0 million on pre-tax earnings of $2.9 million in the nine months ended July 31, 2010.
 
Our projected annual effective tax rate for fiscal year 2011 is 34.3% at July 31, 2011, resulting in a 30.0% effective tax rate, after certain discrete items, for the nine months ended July 31, 2011. In comparison, our projected annual effective tax rate was 36.8% at July 31, 2010, resulting in a 35.5% effective tax rate, after certain discrete items, for the nine months ended July 31, 2010.
 
 
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Segment Results of Operations

We evaluate the performance of our agribusiness, rental operations and real estate development segments separately to monitor the different factors affecting financial results. Each segment is subject to review and evaluations for current market conditions, market opportunities and available resources. The following table shows the segment results of operations for the third quarter and nine months ended July 31, 2011 and 2010:
 
   
Quarter Ended July 31,
   
Nine Months Ended July 31,
 
   
2011
   
2010
   
2011
   
2010
 
    $     %     $     %     $     %     $     %  
Revenues:
                                                       
Agribusiness
  $ 19,910,000       86 %   $ 21,215,000       95 %   $ 36,248,000       87 %   $ 38,689,000       93 %
Rental operations
    978,000       4 %     964,000       4 %     2,944,000       7 %     2,881,000       6 %
Real estate development
    2,314,000       10 %     51,000       1 %     2,421,000       6 %     231,000       1 %
Total revenues
    23,202,000       100 %     22,230,000       100 %     41,613,000       100 %     41,801,000       100 %
Costs and expenses:
                                                               
Agribusiness
    10,518,000       66 %     9,503,000       72 %     27,896,000       67 %     25,065,000       69 %
Rental operations
    596,000       4 %     534,000       4 %     1,688,000       4 %     1,625,000       4 %
Real estate development
    2,613,000       16 %     911,000       7 %     4,466,000       11 %     1,634,000       4 %
Corporate and other
   
2,226,000
      14 %     2,288,000       17 %    
7,396,000
      18 %     8,239,000       23 %
Total costs and expenses
   
15,953,000
      100 %     13,236,000       100 %    
41,446,000
      100 %     36,563,000       100 %
Operating income (loss)
                                                               
Agribusiness
    9,392,000               11,712,000               8,352,000               13,624,000          
Rental operations
    382,000               430,000               1,256,000               1,256,000          
Real estate development
    (299,000 )             (860,000 )             (2,045,000 )             (1,403,000 )        
Corporate and other
   
(2,226,000
)             (2,288,000 )            
(7,396,000
)             (8,239,000 )        
Total operating income (loss)
  $
7,249,000
            $ 8,994,000             $
167,000
            $ 5,238,000          
 
Third Quarter of Fiscal Year 2011 Compared to the Third Quarter of Fiscal Year 2010

The following analysis should be read in conjunction with the previous section “Results of Operations”.

Agribusiness
 
For the third quarter of fiscal year 2011 our agribusiness segment revenue was $19.9 million compared to $21.2 million for the third quarter of fiscal year 2010. The 6% decrease of $1.3 million primarily reflected lower avocado revenue for the fiscal year 2011 third quarter compared to the fiscal year 2010 third quarter.  The decrease in agribusiness revenue primarily consists of the following:

 
·  
Lemon revenue for the third quarter of fiscal year 2011 was $0.7 million higher than the third quarter of fiscal year 2010.

 
·  
Avocado revenue for the third quarter of fiscal year 2011 was $1.4 million lower than the third quarter of fiscal year 2010.
 
 
·
Navel and Valencia orange revenues for the third quarter of fiscal year 2011were $0.3 million lower than the third quarter of fiscal year 2010.

 
·
Specialty citrus and other crop revenues for the third quarter of fiscal year 2011 were $0.4 million lower than the third quarter of fiscal year 2010.
 
 
31

 

Agribusiness costs include packing costs, harvest costs, growing costs, costs related to the lemons we process and sell for third-party growers and depreciation expense. For the third quarter of fiscal year 2011, our agribusiness costs and expenses were $10.5 million compared to $9.5 million for the third quarter of fiscal year 2010. The 11% increase of $1.0 million primarily consists of the following:

 
·  
Packing costs for the third quarter of fiscal year 2011 were $0.4 million higher than the third quarter of fiscal year 2010.

 
·  
Harvest costs for the third quarter of fiscal year 2011 were $1.0 million lower than the third quarter of fiscal year 2010.

 
·  
Growing costs for the third quarter of fiscal year 2011 were $0.5 million higher than the third quarter of fiscal year 2010.

 
·  
Costs related to the lemons we process and sell for third-party growers for the third quarter of fiscal year 2011 were $1.0 million higher than the third quarter of fiscal year 2010.