Limoneira CO 10-Q

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 primarily an agribusiness company founded and based in Santa Paula, California, committed to responsibly using and managing our approximately 15,400 acres of land, water resources and other assets to maximize long-term stockholder value. Our current operations consist of fruit production, sales and marketing, rental operations, real estate 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, one of the largest growers 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, Tulare, San Luis Obispo and San Bernardino Counties in California, Yuma County in Arizona, La Serena, Chile and Jujuy, Argentina, which collectively consist of approximately 6,200 acres of lemons, 900 acres of avocados, 1,400 acres of oranges and 900 acres of specialty citrus and other crops. We also operate our own packinghouses in Santa Paula and Oxnard, California and Yuma, Arizona, where we process, pack and sell lemons that we grow, as well as lemons grown by others. We have a 47% interest in Rosales S.A. (“Rosales”), a citrus packing, marketing and sales business, a 90% interest in Fruticola Pan de Azucar S.A. (“PDA”), a lemon and orange orchard and 100% interest in Agricola San Pablo, SpA ("San Pablo"), a lemon and orange orchard, all of which are located near La Serena, Chile. We have a 51% interest in a joint venture, Trapani Fresh Consorcio de Cooperacion ("Trapani Fresh"), a lemon growing, packing, marketing and selling business in Argentina. Our water resources include water rights, usage rights and pumping 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 and Paso Robles Basins (aquifers). We use ground water from the San Joaquin Valley Basin and water from local water and irrigation districts in Tulare County, which is in California’s San Joaquin Valley. We also use ground water from the Cadiz Valley Basin in California's San Bernardino County and surface water in Arizona from the Colorado River through the Yuma Mesa Irrigation and Drainage District (“YMIDD”). We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in Chile and our Trapani Fresh farming operations in Argentina. For more than 100 years, we have been making strategic investments in California agriculture and real estate. We currently have an interest in three real estate development projects in California. These projects include multi-family housing and single-family homes comprising approximately 260 completed rental units and another approximately 1,150 units in various stages of planning and development. Business Division Summary We have three business divisions: agribusiness, rental operations and real estate development. The agribusiness division is comprised of four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness, and includes our core operations of farming, harvesting, lemon packing and lemon sales operations. The rental operations division includes our residential and commercial rentals, leased land operations and organic recycling. The real estate development division includes our investments in real estate development projects. Financial information and discussion of our four reportable segments are contained in the notes to the accompanying consolidated financial statements of this Quarterly Report on Form 10-Q. Agribusiness Division The agribusiness division represented approximately 97%, 96% and 96% of our fiscal year 2019, 2018 and 2017 consolidated revenues, respectively, of which fresh lemons and lemon packing combined represented 87%, 80% and 78% of our fiscal year 2019, 2018 and 2017 consolidated revenues, respectively. Our lemon farming is included in our “fresh lemons” and “lemon packing” reportable operating segments within our financial statements. We are one of the largest growers of lemons and avocados in the United States. We market and sell lemons directly to our food service, wholesale and retail customers throughout the United States, Canada, Asia, Australia, Europe and certain other international markets. We had approximately $2.1 million of lemon and orange sales in Chile by PDA and San Pablo and $12.1 million of lemon and orange sales in Argentina by Trapani Fresh in the nine months ended July 31, 2020. We sell a majority of our avocados to Calavo. Additionally, we sell our oranges and specialty citrus to Sunkist-licensed and other third-party packinghouses, our pistachios to a roaster, packager and marketer of nuts, and our wine grapes to various wine producers. 29 Historically, our agribusiness operations have been seasonal in nature with quarterly revenue fluctuating depending on the timing and variety of crops being harvested. Cultural costs in our agribusiness 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. Fluctuations in price are a function of global supply and demand with weather conditions, such as unusually low 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 maintaining our own lemon packing operations, even though a significant portion of the costs related to these 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 procured from other growers. Because the fresh utilization rate for our lemons, or percentage of lemons we harvest and pack that are sold 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 other growers if we determine their lemons are of good quality. Our avocado producing business is important to us, yet it faces constraints on growth as there is little additional land with sufficient water 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 can be volatile, the profitability and cash flow realized from our avocados helps to diversify our fruit production base. In addition to growing lemons and avocados, we grow oranges, 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 oranges primarily for export to Japan, China and Korea, which are typically highly profitable niche markets. We produce our specialty citrus and other crops in response to identified consumer trends and believe that we are a leader in the niche production and sale of certain of these high margin fruits. We carefully monitor the respective markets of specialty citrus and other crops and 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. Other Divisions Our rental operations division includes our residential and commercial rentals, leased land operations and organic recycling. Our rental operations division represented approximately 3%, 4% and 4% of our consolidated revenues in fiscal years 2019, 2018 and 2017, respectively. Our residential rental units generate reliable cash flows, which we use to partially fund the operations of all three of our business divisions 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 rental operations is generally level throughout the year. Our real estate development division includes our real estate development investments. The real estate development division had no revenue in fiscal years 2019, 2018 or 2017. We recognize that long-term strategies are required for successful real estate development activities. Our goal is to redeploy real estate earnings and cash flow into the expansion of our agribusiness and other income producing real estate. For real estate development projects and joint ventures, it is not unusual for the timing and amounts of revenues and costs, partner contributions and distributions, project loans and other financing assumptions and project cash flows to be impacted by government approvals, project revenue and cost estimates and assumptions, economic conditions, financing sources and product demand as well as other factors. Such factors could affect our results of operations, cash flows and liquidity. 30 Water Resources Our water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land we own. Water for our farming operations located in Ventura County, California is sourced from the existing water resources associated with our land, which includes approximately 8,600-acre feet of adjudicated water rights in the Santa Paula Basin (aquifer) and the un-adjudicated Fillmore Basin. We use a combination of ground water provided by wells that derive water from the San Joaquin Valley Basin and water from various water districts and irrigation districts in Tulare County, California, which is in the agriculturally productive San Joaquin Valley. We use ground water provided by wells which derive water from the Cadiz Valley Basin at the Cadiz Ranch in San Bernardino County, California. Our Windfall Farms property located in San Luis Obispo County, California obtains water from wells that derive water from the Paso Robles Basin. Our Associated Citrus Packers, Inc. ("Associated") farming operations in Yuma, Arizona source water from the Colorado River through the YMIDD, where we have access to approximately 11,700-acre feet of Class 3 Colorado River water rights. We use ground water provided by wells and surface water for our PDA and San Pablo farming operations in La Serena, Chile and our Trapani Fresh farming operations in Argentina. California has historically experienced periods of below average precipitation. Precipitation in 2019 brought relief to California’s drought conditions, although the few years prior to 2019 were among the most severe droughts on record. Rainfall, snow levels and water content of snow pack were significantly below historical averages. These conditions resulted in reduced water levels in streams, rivers, lakes, aquifers and reservoirs. Federal officials oversee the Central Valley Project, California’s largest water delivery system and 100% of the contracted amount of water was provided to San Joaquin Valley farmers in 2019, 2018 and 2017 compared to 75% in 2016 and zero in 2015. Recent Developments We are equal partners in a joint venture with The Lewis Group of Companies (“Lewis”) for the residential development of our East Area I real estate development project. To consummate the transaction, we formed Limoneira Lewis Community Builders, LLC (the "LLCB" or "Joint Venture") as the development entity. The first phase of the project broke ground to commence mass grading in November 2017. The Joint Venture has closed on lot sales representing 354 units from inception through July 31, 2020. For further information see Note 7 – Real Estate Development of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. On May 30, 2019, we acquired a 51% interest in a joint venture, Trapani Fresh, formed with FGF Trapani (“FGF”), a multi-generational, family owned citrus operation in Argentina. To consummate the transaction, we formed a subsidiary under the name Limoneira Argentina S.A.U. (“Limoneira Argentina”) as the managing partner and acquired a 51% interest in an Argentine Trust that holds a 75% interest in Finca Santa Clara (“Santa Clara”), a ranch with approximately 1,200 acres of planted lemons. Trapani Fresh controls the trust and grows, packs, markets and sells fresh citrus. Total consideration paid for our interest in Trapani Fresh was $15.0 million. Subsequently, in February 2020, FGF agreed to a decrease in the purchase consideration of $0.2 million to reflect profits that Limoneira Argentina would have received had the transaction been consummated at the beginning of the 2019 lemon export season. In the first quarter of fiscal year 2020, we entered into an agreement to sell our Sevilla property for $2.7 million. After transaction and other costs, we expect to receive proceeds of approximately $2.6 million and recognize an insignificant gain. At July 31, 2020, the $2.5 million carrying value of the property was classified as held for sale and included in prepaid expenses and other current assets. In March 2020, we entered into a revolving equity line of credit promissory note and loan agreement with Farm Credit West for a $15.0 million Revolving Equity Line of Credit (the "RELOC") secured by a first lien on the Windfall Investors, LLC property. The RELOC matures in 2043 and features a 3-year draw period followed by 20 years of fully amortized loan payments. The interest rate is variable with monthly interest-only payments during the 3-year draw period and monthly principal and interest payments thereafter. In March 2020, we sold our remaining 200,000 shares of Calavo Growers, Inc. ("Calavo") common stock at an average price of $55.29 per share. Net proceeds from the sale were $11.0 million and we recognized a loss of $6.3 million. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, the creation of certain refundable employee retention credits, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. We have evaluated the impact on our consolidated financial statements and estimated the impact of approximately $2.0 31 million of income tax benefit and $6.4 million federal and California refunds in calendar year 2020. We anticipate we will benefit from the utilization of net operating losses, the technical correction for qualified leasehold improvements eligible for 100% tax bonus depreciation and potentially other provisions within the CARES Act. On March 12, 2020, the Board of Directors of our Company approved a share repurchase program authorizing us to repurchase up to $10.0 million of our outstanding shares of common stock through March 2021. Under the share repurchase program, purchases of shares of common stock may be made from time to time in the open market or in privately negotiated transactions. The share repurchase program may be modified, suspended or discontinued at any time and does not commit us to repurchase shares of our common stock. During the quarter ended July 31, 2020, we repurchased 42,100 shares under the share repurchase program for approximately $0.6 million. As of July 31, 2020, the remaining authorization under this program is approximately $9.4 million. On June 30, 2020, we entered into a Conversion Agreement with Farm Credit West to convert our term loans to fixed interest rates effective July 1, 2020. No changes were made to the outstanding principal balances on the loans and no cash repayments of principal were made by us. The rates are subject to a prepayment restriction period for a portion of the fixed rate term that will expire on January 1, 2021, after which we may prepay any amounts without penalty. In June 2020, we entered into an agreement to sell a property, located in Lindsay, California, for $6.0 million. The transaction closed on August 26, 2020 with us receiving net proceeds of $6.0 million. After transaction and other costs, we recorded a loss of approximately $0.3 million as of July 31, 2020. For fiscal year 2019, we declared cash dividends to our stockholders totaling $0.30 per common share in the aggregate amount of $5.3 million. On July 13, 2020, we declared a cash dividend of $0.075 per common share, which was paid on July 17, 2020, in the aggregate amount of $1.3 million to common stockholders of record as of July 6, 2020. On April 15, 2020, we declared a cash dividend of $0.075 per common share, which was paid on April 19, 2020, in the aggregate amount of $1.3 million to common stockholders of record as of April 8, 2020. On December 17, 2019, we declared a cash dividend of $0.075 per common share, which was paid on January 15, 2020, in the aggregate amount of $1.3 million to common stockholders of record as of December 30, 2019. COVID-19 Pandemic The global spread of the novel coronavirus (COVID-19) in recent months has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The impact of this pandemic has created significant uncertainty in the global economy and has affected our business, employees, suppliers, and customers. The COVID-19 pandemic has had an adverse impact on the industries and markets in which we conduct business. In particular, the United States lemon market has seen a significant decline in volume, with lemon demand falling since wide spread shelter in place orders were issued in mid-March, resulting in a significant market oversupply. The export market for fresh product has also significantly declined due to COVID-19 impacts. The decline in demand for our products beginning the second quarter of 2020, which we believe was a result of the COVID-19 pandemic, negatively impacted our sales and profitability for the second and third quarters of 2020. We also expect an adverse impact on our sales and profitability in future periods. These impacts are expected to be material. However, the duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors, many of which are outside management’s control, including those presented in - Item 1A. Risk Factors of this Quarterly Report. Although subject to unforeseen changes that may arise as the COVID-19 pandemic continues to unfold, we currently expect improvement during the fourth quarter of fiscal year 2020 and into fiscal year 2021, specifically as restaurants and bars continue to reopen. We took proactive actions early on to protect the health of our employees and their families, including curtailing business travel and encouraging video conferencing whenever possible. In addition, as the COVID-19 pandemic worsened throughout March and into April and May 2020, we allowed personnel to work remotely to the extent possible. While we believe we have taken appropriate measures to mitigate the impacts of the COVID-19 pandemic, as the situation evolves into what could be a more prolonged pandemic, we will continue to analyze additional mitigation measures that may be needed to preserve the health and safety of our workforce and our customers and the ongoing continuity of our business operations. Those measures might include modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, or such other industry best practices needed to continue to maintain a healthy and safe environment for our employees amidst the COVID-19 pandemic. 32 Given the economic uncertainty as a result of the COVID-19 pandemic, we have taken actions to improve our current liquidity position, including temporarily postponing capital expenditures, selling equity securities to increase cash, reducing operating costs, and substantially reducing discretionary spending. We are one of the largest growers of lemons and avocados in the United States and maintain our country's food chain infrastructure and thus are considered an essential business and permitted to remain open during the ongoing pandemic, be it at reduced volumes, in order to fulfill our customers' needs. However, there is significant uncertainty around the breadth and duration of our business disruptions related to the COVID-19 pandemic, as well as its impact on the U.S. economy, the ongoing business operations of our clients and our results of operations and financial condition. While our management team is actively monitoring the impacts of the COVID-19 pandemic and may take further actions altering our business operations that we determine are in the best interests of our employees and clients or as required by federal, state, or local authorities, the full impact of the COVID-19 pandemic on our results of operations, financial condition, or liquidity for the remainder of fiscal year 2020 and beyond cannot be fully estimated at this point. The following discussions are subject to the future effects of the COVID-19 pandemic on our ongoing business operations. 33 Results of Operations The following table shows the results of operations (in thousands): Three Months Ended July 31, Nine Months Ended July 31, 2020 2019 2020 2019 Revenues: Agribusiness $ 52,387 $ 49,631 $ 131,309 $ 131,254 Other operations 1,172 1,238 3,477 3,668 Total net revenues 53,559 50,869 134,786 134,922 Costs and expenses: Agribusiness 46,826 42,747 125,318 118,741 Other operations 1,010 1,043 3,396 3,269 Selling, general and administrative 3,909 4,961 15,557 14,819 Total costs and expenses 51,745 48,751 144,271 136,829 Operating income (loss): Agribusiness 5,561 6,884 5,991 12,513 Other operations 162 195 81 399 Selling, general and administrative (3,909) (4,961) (15,557) (14,819) Operating income (loss) 1,814 2,118 (9,485) (1,907) Other income (expense): Interest expense, net (92) (774) (1,089) (1,313) Equity in earnings of investments, net 832 480 341 2,449 Loss on stock in Calavo Growers, Inc. — (1,775) (6,299) (2,073) Other income, net 11 15 246 375 Total other income (expense) 751 (2,054) (6,801) (562) Income (loss) before income tax (provision) benefit 2,565 64 (16,286) (2,469) Income tax (provision) benefit (765) (461) 5,876 216 Net income (loss) 1,800 (397) (10,410) (2,253) Net loss (income) attributable to noncontrolling interest 509 (593) 1,409 (615) Net income (loss) attributable to Limoneira Company $ 2,309 $ (990) $ (9,001) $ (2,868) 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, income taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA, which excludes LLCB earnings in equity investments, loss on stock in Calavo, disposals of assets and impairments on real estate development assets when applicable, 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 us and may not be consistent with methodologies used by other companies. EBITDA and adjusted EBITDA are summarized and reconciled to net loss attributable to Limoneira Company which management considers to be the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands): 34 Three Months Ended July 31, Nine Months Ended July 31, 2020 2019 2020 2019 Net income (loss) attributable to Limoneira Company $ 2,309 $ (990) $ (9,001) $ (2,868) Interest expense, net 92 774 1,089 1,313 Income tax provision (benefit) 765 461 (5,876) (216) Depreciation and amortization 2,557 2,080 7,555 6,327 EBITDA $ 5,723 $ 2,325 $ (6,233) $ 4,556 Loss on stock in Calavo Growers, Inc. — 1,775 6,299 2,073 LLCB earnings in equity investment, net (668) (303) (607) (2,573) Loss on asset disposals 255 — 769 — Adjusted EBITDA $ 5,310 $ 3,797 $ 228 $ 4,056 Three Months Ended July 31, 2020 Compared to the Three Months Ended July 31, 2019 Revenues Total net revenues for the third quarter of fiscal year 2020 were $53.6 million compared to $50.9 million for the same period of fiscal year 2019. The 5% increase of $2.7 million was primarily the result of increased agribusiness revenues, as detailed below ($ in thousands): Agribusiness Revenues for the Three Months Ended July 31, 2020 2019 Change Lemons $ 43,234 $ 46,401 $ (3,167) (7)% Avocados 6,133 2,519 3,614 143% Oranges 2,232 711 1,521 214% Specialty citrus and other crops 788 — 788 — Agribusiness revenues $ 52,387 $ 49,631 $ 2,756 6% • Lemons: The decrease in the third quarter of fiscal year 2020 was primarily the result of lower prices partially offset by increased volume of fresh lemons sold compared to the same period in fiscal year 2019. During the third quarter of fiscal years 2020 and 2019, fresh lemon sales were $35.4 million and $35.8 million on, in aggregate, 1,979,000 and 1,876,000 cartons of lemons sold at average per carton prices of $17.91 and $19.09, respectively. COVID-19 related food service closures reduced the demand for lemons in the food service marketplace and created an over-supply in the retail marketplace. This oversupply of lemons resulted in lower average per carton prices in the third quarter of fiscal year 2020 compared to the same period in fiscal year 2019. Lemon revenues in the third quarter of fiscal years 2020 and 2019 included $3.8 million and $5.2 million shipping and handling, $1.1 million and $3.6 million lemon by-products and $2.9 million and $1.8 million other lemon sales, respectively. • Avocados: The increase in the third quarter of fiscal year 2020 was primarily the result of increased volume partially offset by lower prices of avocados sold compared to the same period in fiscal year 2019. During the third quarter of fiscal years 2020 and 2019, we sold 6.1 million and 1.4 million pounds of avocados at an average per pound price of $1.00 and $1.80, respectively. • Oranges: The increase in the third quarter of fiscal year 2020 was primarily the result of higher prices partially offset by decreased volume of oranges sold compared to the same period in fiscal year 2019. In the third quarter of fiscal years 2020 and 2019, we sold 184,000 and 382,000 40-pound carton equivalents of oranges at an average per carton price of $12.13 and $1.86, respectively. • Specialty citrus and other crops: During the third quarter of fiscal year 2020, we sold 72,000 40-pound carton equivalents of specialty citrus at an average per carton price of $10.94. There were no sales in the third quarter of fiscal year 2019. 35 Costs and Expenses Our total costs and expenses in the third quarter of fiscal year 2020 were $51.7 million compared to $48.8 million in the same period of fiscal year 2019. The 6% increase of $3.0 million was primarily attributable to increases in our agribusiness costs partially offset by decreases in selling, general and administrative expenses. Costs and expenses associated with our agribusiness include packing costs, harvest costs, growing costs, costs related to the fruit we procure and sell for third-party growers and depreciation and amortization expense, as detailed below ($ in thousands): Agribusiness Costs and Expenses for the Three Months Ended July 31, 2020 2019 Change Packing costs $ 16,993 $ 13,524 $ 3,469 26% Harvest costs 6,698 6,296 402 6% Growing costs 6,237 6,389 (152) (2)% Third-party grower costs 14,627 14,715 (88) (1)% Depreciation and amortization 2,271 1,823 448 25% Agribusiness costs and expenses $ 46,826 $ 42,747 $ 4,079 10% • Packing costs: Packing costs primarily consist of the costs to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. In the third quarter of fiscal years 2020 and 2019, lemon packing costs excluding shipping costs were $15.9 million and $12.0 million, respectively. During the third quarter of fiscal years 2020 and 2019, we packed and sold 1,979,000 and 1,876,000 cartons of lemons at average per carton costs of $8.05 and $6.41, respectively. Additionally, packing costs included $1.1 million and $1.5 million of shipping costs in the third quarter of fiscal years 2020 and 2019, respectively. • Harvest costs: The increase in the third quarter of fiscal year 2020 was primarily the result of increased volume of avocados harvested compared to the same period in fiscal year 2019. • Growing costs: Growing costs, also referred to as cultural costs, consist of orchard maintenance costs such as cultivation, fertilization and soil amendments, pest control, pruning and irrigation. In the third quarter of fiscal year 2020 growing costs were similar to the same period in fiscal year 2019. Growing costs reflect farm management decisions based on weather, harvest timing and crop conditions. • Third-party grower costs: We sell fruit that we grow and fruit that we procure from other growers. The cost of procuring fruit from other growers is referred to as third-party grower costs. The decrease in the third quarter of fiscal year 2020 was primarily attributable to lower prices partially offset by increased volume of third-party grower fruit sold. Of the 1,979,000 and 1,876,000 cartons of lemons packed and sold during the third quarter of fiscal years 2020 and 2019, respectively, 1,269,000 (64%) and 1,101,000 (59%) cartons were procured from third-party growers at average per carton prices of $8.78 and $11.65, respectively. • Depreciation and amortization: Depreciation and amortization expense for the third quarter of fiscal year 2020 was approximately $0.4 million higher than the same period of fiscal year 2019, primarily due to the acquisition of Trapani Fresh in May 2019 and increased assets placed into service. Selling, general and administrative costs and expenses were $3.9 million in the three months ended July 31, 2020 compared to $5.0 million in the three months ended July 31, 2019. The $1.1 million decrease was primarily the result of $0.9 million decrease in general and administrative expenses, including certain corporate overhead expenses and $0.2 million decrease in salaries, benefits and incentive compensation as of July 31, 2020 compared to July 31, 2019. Other (Expense) Income Other income for the three months ended July 31, 2020 was comprised primarily of $0.8 million of equity in earnings of investments partially offset by $0.1 million of interest expense, net. Other expense for the three months ended July 31, 2019 was comprised primarily of $1.8 million loss on stock in Calavo Growers, Inc. and $0.8 million of interest expense, net, partially offset by $0.5 million of equity in investments. 36 Income Taxes We recorded an estimated income tax provision of $0.8 million and $0.5 million in the third quarter of fiscal years 2020 and 2019 on pre-tax income of $2.6 million and $0.1 million, respectively. The tax provision recorded for the third quarter of fiscal year 2020 differs from the U.S. federal statutory tax rate of 21.0% due primarily to a $0.6 million discrete benefit related to the CARES Act. Our projected annual effective blended tax rate for fiscal year 2020 excluding discrete items is approximately 25.9%. Net Loss (Income) Attributable to Noncontrolling Interest Net loss (income) attributable to noncontrolling interest represents 10% and 49% of the net loss (income) of PDA and Trapani Fresh, respectively. Nine Months Ended July 31, 2020 Compared to the Nine Months Ended July 31, 2019 Revenues Total net revenues were similar for the nine months ended July 31, 2020 at $134.8 million compared to $134.9 million for the nine months ended July 31, 2019, which was primarily the result of offsetting agribusiness revenues, as detailed below ($ in thousands): Agribusiness Revenues for the Nine Months Ended July31, 2020 2019 Change Lemons $ 111,983 $ 121,379 $ (9,396) (8)% Avocados 8,323 3,062 5,261 172% Oranges 7,171 3,794 3,377 89% Specialty citrus and other crops 3,832 3,019 813 27% Agribusiness revenues $ 131,309 $ 131,254 $ 55 —% • Lemons: The decrease in the first nine months of fiscal year 2020 was primarily the result of lower prices partially offset by increased volume of fresh lemons sold compared to the same period in fiscal year 2019. During the first nine months of fiscal years 2020 and 2019, fresh lemon sales were $87.8 million and $93.1 million on, in aggregate, 4,734,000 and 4,448,000 cartons of lemons sold at average per carton prices of $18.54 and $20.92, respectively. COVID-19 related food service closures reduced the demand for lemons in the food service marketplace and created an over-supply in the retail marketplace. This oversupply of lemons resulted in lower average per carton prices in the second and third quarters of fiscal year 2020 compared to the same periods in fiscal year 2019. Lemon revenues included $11.8 million and $13.3 million shipping and handling, $3.7 million and $9.9 million lemon by-products and $8.8 million and $5.1 million other lemon sales during the first nine months of fiscal years 2020 and 2019, respectively. • Avocados: The increase in the first nine months of fiscal year 2020 was primarily the result of increased volume partially offset by lower prices of avocados sold compared to the same period in fiscal year 2019. During the first nine months of fiscal years 2020 and 2019, we sold 7.5 million and 1.8 million pounds of avocados at an average per pound price of $1.11 and $1.71, respectively. • Oranges: The increase in the first nine months of fiscal year 2020 was primarily the result of higher prices partially offset by decreased volume of oranges sold compared to the same period in fiscal year 2019. During the nine months of fiscal years 2020 and 2019, we sold 736,000 and 863,000 40-pound carton equivalents of oranges at average per carton prices of $9.74 and $4.40, respectively. • Specialty citrus and other crops: The increase in the first nine months of fiscal year 2020 was primarily the result of higher prices partially offset by decreased volume of specialty citrus sold compared to the same period in fiscal year 2019. During the first nine months of fiscal years 2020 and 2019, we sold 328,000 and 358,000 40-pound carton equivalents of specialty citrus at an average per carton price of $11.68 and $8.43, respectively. Costs and Expenses Our total costs and expenses in the first nine months of fiscal year 2020 were $144.3 million compared to $136.8 million in the same period of fiscal year 2019. The 5% increase of $7.4 million was primarily attributable to increases in our agribusiness and selling, general and administrative costs and expenses. Costs and expenses associated with our agribusiness include packing costs, harvest 37 costs, growing costs, costs related to the fruit we procure and sell for third-party growers and depreciation and amortization expense, as detailed below ($ in thousands): Agribusiness Costs and Expenses for the Nine Months Ended July 31, 2020 2019 Change Packing costs $ 37,279 $ 32,972 $ 4,307 13% Harvest costs 17,550 15,533 2,017 13% Growing costs 22,828 20,667 2,161 10% Third-party grower costs 40,946 44,018 (3,072) (7)% Depreciation and amortization 6,715 5,551 1,164 21% Agribusiness costs and expenses $ 125,318 $ 118,741 $ 6,577 6% • Packing costs: Packing costs primarily consist of the costs to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. Lemon packing costs excluding shipping costs were $34.9 million and $30.2 million in the first nine months of fiscal years 2020 and 2019, respectively. During the first nine months of fiscal years 2020 and 2019, we packed and sold 4,734,000 and 4,448,000 cartons of lemons at average per carton costs of $7.38 and $6.78, respectively. Additionally, packing costs included $2.4 million and $2.8 million of shipping costs in the first nine months of fiscal years 2020 and 2019. • Harvest costs: The increase in the first nine months of fiscal year 2020 was primarily the result of increased volume of lemons and avocados harvested compared to the same period in fiscal year 2019. • Growing costs: Growing costs, also referred to as cultural costs, consist of orchard maintenance costs such as cultivation, fertilization and soil amendments, pest control, pruning and irrigation. The increase in the first nine months of fiscal year 2020 compared to the same period in fiscal year 2019 was primarily due to an increase in cultivation costs. Growing costs reflect farm management decisions based on weather, harvest timing and crop conditions. • Third-party grower costs: We sell fruit that we grow and fruit that we procure from other growers. The cost of procuring fruit from other growers is referred to as third-party grower costs. The decrease in the first nine months of fiscal year 2020 is primarily attributable to lower prices partially offset by increased volume of third-party grower fruit sold. Of the 4,734,000 and 4,448,000 cartons of lemons packed and sold during the first nine months of fiscal years 2020 and 2019, respectively, 2,856,000 (60%) and 2,628,000 (59%) cartons were procured from third-party growers at average per carton prices of $11.61 and $15.87, respectively. • Depreciation and amortization: Depreciation and amortization expense for the first nine months of fiscal year 2020 was approximately $1.2 million higher than the same period of fiscal year 2019, primarily due to the acquisition of Trapani Fresh in May 2019. Selling, general and administrative costs and expenses were $15.6 million in the nine months ended July 31, 2020 compared to $14.8 million in the nine months ended July 31, 2019. The $0.7 million increase was primarily the result of $0.5 million increase in training costs associated with an ERP implementation and $0.4 million increase of other selling, general and administrative expenses, including certain corporate overhead expenses, partially offset by $0.2 million decrease in salaries, benefits and incentive compensation. Other (Expense) Income Other expense for the nine months ended July 31, 2020 was comprised primarily of $6.3 million loss on stock in Calavo Growers, Inc. and $1.1 million of interest expense, net, partially offset by $0.3 million of equity in earnings of investments. Other expense for the nine months ended July 31, 2019 was comprised primarily of $2.1 million loss on stock in Calavo Growers, Inc. and $1.3 million of interest expense, net, partially offset by $2.4 million of equity in earnings of investments. Income Taxes We recorded an estimated income tax benefit of $5.9 million and $0.2 million in the first nine months of fiscal years 2020 and 2019 on pre-tax loss of $16.3 million and $2.5 million, respectively. The tax benefit recorded for the first nine months of fiscal year 2020 differs from the U.S. federal statutory tax rate of 21.0% due primarily to a $2.0 million discrete benefit related to the CARES Act. Our projected annual effective blended tax rate for fiscal year 2020 excluding discrete items is approximately 25.9%. 38 Net Loss (Income) Attributable to Noncontrolling Interest Net loss (income) attributable to noncontrolling interest represents 10% and 49% of the net loss (income) of PDA and Trapani Fresh, respectively. Segment Results of Operations We operate in four reportable operating segments: fresh lemons, lemon packing, avocados and other agribusiness. Our reportable operating segments are strategic business units with different products and services, distribution processes and customer bases. We evaluate the performance of our operating segments separately to monitor the different factors affecting financial results. Each segment is subject to review and evaluations related to current market conditions, market opportunities and available resources. See Note 20 - Segment Information of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding our operating segments. Three Months Ended July 31, 2020 Compared to the Three Months Ended July 31, 2019 The following table shows the segment results of operations for the three months ended July 31, 2020 (in thousands): Fresh Lemons Lemon Packing Eliminations Avocados Other Agribusiness Total Agribusiness Corporate and Other Total Revenues from external customers $ 39,459 $ 3,775 $ — $ 6,133 $ 3,020 $ 52,387 $ 1,172 $ 53,559 Intersegment revenue — 16,330 (16,330) — — — — — Total net revenues 39,459 20,105 (16,330) 6,133 3,020 52,387 1,172 53,559 Costs and expenses 39,694 15,988 (16,330) 2,537 2,666 44,555 4,633 49,188 Depreciation and amortization — — — — — 2,271 286 2,557 Operating (loss) income $ (235) $ 4,117 $ — $ 3,596 $ 354 $ 5,561 $ (3,747) $ 1,814 The following table shows the segment results of operations for the three months ended July 31, 2019 (in thousands): Fresh Lemons Lemon Packing Eliminations Avocados Other Agribusiness Total Agribusiness Corporate and Other Total Revenues from external customers $ 41,169 $ 5,232 $ — $ 2,519 $ 711 $ 49,631 $ 1,238 $ 50,869 Intersegment revenue — 10,263 (10,263) — — — — — Total net revenues 41,169 15,495 (10,263) 2,519 711 49,631 1,238 50,869 Costs and expenses 35,653 13,524 (10,263) 1,185 825 40,924 5,747 46,671 Depreciation and amortization — — — — — 1,823 257 2,080 Operating income (loss) $ 5,516 $ 1,971 $ — $ 1,334 $ (114) $ 6,884 $ (4,766) $ 2,118 The following analysis should be read in conjunction with the previous section “Results of Operations.” Fresh Lemons For the third quarter of fiscal years 2020 and 2019, our fresh lemons segment total net revenues were $39.5 million and $41.2 million, respectively. The 4% decrease of $1.7 million was primarily due to decreases in fresh lemon carton sales of $0.4 million and lemon by-products of $2.5 million, partially offset by an increase in brokerage and other sales of $1.1 million. Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs and costs of fruit we procure from third-party growers. For the third quarter of fiscal years 2020 and 2019, our fresh lemons segment costs and expenses were $39.7 million and $35.7 million, respectively. The 11% increase of $4.0 million primarily consisted of the following: • Harvest costs for the third quarter of fiscal year 2020 were $0.3 million lower than the same period of fiscal year 2019. • Growing costs for the third quarter of fiscal year 2020 were $2.3 million lower than the same period of fiscal year 2019. • Third-party grower costs for the third quarter of fiscal year 2020 were $0.5 million lower than the same period of fiscal year 2019. 39 • Transportation costs for the third quarter of fiscal year 2020 were $1.1 million higher than the same period of fiscal year 2019. • Intersegment costs and expenses for the third quarter of fiscal year 2020 were $6.1 million higher than the same period of fiscal year 2019. Lemon Packing Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For the third quarter of fiscal years 2020 and 2019, our lemon packing segment total net revenues were $20.1 million and $15.5 million, respectively. Costs and expenses associated with our lemon packing segment consist of the cost to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. For the third quarter of fiscal years 2020 and 2019, our lemon packing costs and expenses were $16.0 million and $13.5 million, respectively. For the third quarter of fiscal years 2020 and 2019, lemon packing segment operating income per carton sold was $2.08 and $1.05, respectively. In the third quarter of fiscal years 2020 and 2019, the lemon packing segment included $16.3 million and $10.3 million, respectively, of intersegment revenues that were charged to the fresh lemons segment to pack lemons for sale. Such intersegment revenues and expenses are eliminated in our consolidated financial statements. Avocados For the third quarter of fiscal years 2020 and 2019, our avocados segment had total net revenues of $6.1 million and $2.5 million, respectively. Costs and expenses associated with our avocados segment include harvest and growing costs. For the third quarter of fiscal years 2020 and 2019, our avocados segment costs and expenses were $2.5 million and $1.2 million, respectively. The 114% increase of $1.4 million primarily consisted of the following: • Harvest costs for the third quarter of fiscal year 2020 were $0.6 million higher than the same period of fiscal year 2019. • Growing costs for the third quarter of fiscal year 2020 were $0.7 million higher than the same period of fiscal year 2019. Other Agribusiness For the third quarter of fiscal years 2020 and 2019, our other agribusiness segment total net revenues were $3.0 million and $0.7 million, respectively. The 325% increase of $2.3 million primarily consisted of the following: • Orange revenues for the third quarter of fiscal year 2020 were $1.5 million higher than the same period of fiscal year 2019. • Specialty citrus and other crops revenues for the third quarter of fiscal year 2020 were $0.8 million higher than the same period of fiscal year 2019. Costs and expenses associated with our other agribusiness segment include harvest costs, growing costs and purchased fruit costs. For the third quarter of fiscal years 2020 and 2019, our other agribusiness costs and expenses were $2.7 million and $0.8 million, respectively. The 223% increase of $1.8 million primarily consisted of the following: • Harvest costs for the third quarter of fiscal year 2020 were $0.1 million higher than the same period of fiscal year 2019. • Growing costs for the third quarter of fiscal year 2020 were $1.3 million higher than the same period of fiscal year 2019. • Purchased fruit costs for the third quarter of fiscal year 2020 were $0.4 million higher than the same period of fiscal year 2019. 40 Total agribusiness depreciation and amortization expenses for the third quarter of fiscal year 2020 were $0.4 million higher than the same period of fiscal year 2019. Corporate and Other Our rental operations had total net revenues of approximately $1.2 million for the third quarter of fiscal years 2020 and 2019. Costs and expenses in rental operations and real estate development for the third quarter of fiscal years 2020 and 2019 were similar at approximately $1.0 million. Depreciation and amortization expenses for the third quarter of fiscal years 2020 and 2019 were similar at approximately $0.3 million. Selling, general and administrative costs and expenses include other costs not allocated to the operating segments. Selling, general and administrative costs and expenses for the third quarter of fiscal year 2020 were $1.1 million lower than the same period of fiscal year 2019. Nine Months Ended July 31, 2020 Compared to the Nine Months Ended July 31, 2019 The following table shows the segment results of operations for the nine months ended July 31, 2020 (in thousands): Fresh Lemons Lemon Packing Eliminations Avocados Other Agribusiness Total Agribusiness Corporate and Other Total Revenues from external customers $ 100,231 $ 11,752 $ — $ 8,323 $ 11,003 $ 131,309 $ 3,477 $ 134,786 Intersegment revenue — 31,889 (31,889) — — — — — Total net revenues 100,231 43,641 (31,889) 8,323 11,003 131,309 3,477 134,786 Costs and expenses 101,006 34,925 (31,889) 4,571 9,990 118,603 18,113 136,716 Depreciation and amortization — — — — — 6,715 840 7,555 Operating (loss) income $ (775) $ 8,716 $ — $ 3,752 $ 1,013 $ 5,991 $ (15,476) $ (9,485) The following table shows the segment results of operations for the nine months ended July 31, 2019 (in thousands): Fresh Lemons Lemon Packing Eliminations Avocados Other Agribusiness Total Agribusiness Corporate and Other Total Revenues from external customers $ 108,090 $ 13,289 $ — $ 3,062 $ 6,813 $ 131,254 $ 3,668 $ 134,922 Intersegment revenue — 25,464 (25,464) — — — — — Total net revenues 108,090 38,753 (25,464) 3,062 6,813 131,254 3,668 134,922 Costs and expenses 95,650 32,972 (25,464) 2,822 7,210 113,190 17,312 130,502 Depreciation and amortization — — — — — 5,551 776 6,327 Operating income (loss) $ 12,440 $ 5,781 $ — $ 240 $ (397) $ 12,513 $ (14,420) $ (1,907) The following analysis should be read in conjunction with the previous section “Results of Operations.” Fresh Lemons For the first nine months of fiscal years 2020 and 2019, our fresh lemons segment total net revenues were $100.2 million and $108.1 million, respectively. The 7% decrease of $7.9 million was primarily due to decreases in fresh lemon carton sales of $5.3 million and lemon by-products of $6.3 million, partially offset by an increase in brokerage and other sales of $3.7 million. Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs and costs of fruit we procure from third-party growers. For the first nine months of fiscal years 2020 and 2019, our fresh lemons segment costs and expenses were $101.0 million and $95.7 million, respectively. The 6% increase of $5.4 million primarily consisted of the following: • Harvest costs for the first nine months of fiscal year 2020 were $1.1 million higher than the same period of fiscal year 2019 • Growing costs for the first nine months of fiscal year 2020 were $0.3 million higher than the same period of fiscal year 2019. • Third-party grower costs for the first nine months of fiscal year 2020 were $4.9 million lower than the same period of fiscal year 2019. 41 • Transportation costs for the first nine months of fiscal year 2020 were $2.4 million higher than the same period of fiscal year 2019. • Intersegment costs and expenses for the first nine months of fiscal year 2020 were $6.4 million higher than the same period of fiscal year 2019. Lemon Packing Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For the first nine months of fiscal years 2020 and 2019, our lemon packing segment total net revenues were $43.6 million and $38.8 million, respectively. Costs and expenses associated with our lemon packing segment consist of the cost to pack lemons for sale such as labor and benefits, cardboard cartons, fruit treatments, packing and shipping supplies and facility operating costs. For the first nine months of fiscal years 2020 and 2019, our lemon packing costs and expenses were $34.9 million and $33.0 million, respectively. For the first nine months of fiscal years 2020 and 2019, lemon packing segment operating income per carton sold was $1.84 and $1.30, respectively. In the first nine months of fiscal years 2020 and 2019, the lemon packing segment included $31.9 million and $25.5 million, respectively, of intersegment revenues that were charged to the fresh lemons segment to pack lemons for sale. Such intersegment revenues and expenses are eliminated in our consolidated financial statements. Avocados For the first nine months of fiscal years 2020 and 2019, our avocados segment had total net revenues of $8.3 million and $3.1 million, respectively. Costs and expenses associated with our avocados segment include harvest and growing costs. For the first nine months of fiscal years 2020 and 2019, our avocados segment costs and expenses were $4.6 million and $2.8 million, respectively. The 62% increase of $1.7 million primarily consisted of the following: • Harvest costs for the first nine months of fiscal year 2020 were $0.8 million higher than the same period of fiscal year 2019. • Growing costs for the first nine months of fiscal year 2020 were $1.0 million higher than the same period of fiscal year 2019. Other Agribusiness For the first nine months of fiscal years 2020 and 2019, our other agribusiness segment total net revenues were $11.0 million and $6.8 million, respectively. The 62% increase of $4.2 million primarily consisted of the following: • Orange revenues for the first nine months of fiscal year 2020 were $3.4 million higher than the same period of fiscal year 2019. • Specialty citrus and other crops revenues for the first nine months of fiscal year 2020 were $0.8 million higher than the same period of fiscal year 2019. Costs and expenses associated with our other agribusiness segment include harvest costs, growing costs and purchased fruit costs. For the first nine months of fiscal years 2020 and 2019, our other agribusiness costs and expenses were $10.0 million and $7.2 million, respectively. The 39% increase of $2.8 million primarily consisted of the following: • Harvest costs for the first nine months of fiscal year 2020 were $0.1 million higher than the same period of fiscal year 2019. • Growing costs for the first nine months of fiscal year 2020 were $0.9 million higher than the same period of fiscal year 2019. • Purchased fruit costs for the first nine months of fiscal year 2020 were $1.8 million higher than the same period of fiscal year 2019. 42 Total agribusiness depreciation and amortization expenses for the first nine months of fiscal year 2020 were $1.2 million higher than the same period of fiscal year 2019. Corporate and Other Our rental operations had total net revenues of approximately $3.5 million and $3.7 million for the first nine months of fiscal years 2020 and 2019, respectively. Costs and expenses in rental operations and real estate development for the first nine months of fiscal years 2020 and 2019 were $3.4 million and $3.3 million, respectively. Depreciation and amortization expenses for the first nine months of fiscal years 2020 and 2019 were similar at approximately $0.8 million. Selling, general and administrative costs and expenses include other costs not allocated to the operating segments. Selling, general and administrative costs and expenses for the first nine months of fiscal year 2020 were $0.7 million higher than the same period of fiscal year 2019. Seasonal Operations Historically, our agribusiness operations have been seasonal in nature with quarterly revenue fluctuating depending on the timing and the variety of crops being harvested. Cultural costs in our agribusiness 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. Due to this seasonality and to avoid the inference that interim results are indicative of the estimated results for a full fiscal year, we present supplemental information for 12-month periods ended at the interim date for the current and preceding years. 43 Results of Operations for the Trailing Twelve Months Ended July 31, 2020 and 2019 The following table shows the unaudited results of operations (in thousands): Trailing Twelve Months Ended July 31, 2020 2019 Revenues: Agribusiness $ 166,604 $ 144,723 Other operations 4,658 4,913 Total revenues 171,262 149,636 Costs and expenses: Agribusiness 158,949 135,881 Other operations 4,566 4,342 Impairment of real estate development assets — 1,558 Gain on sale of property assets (1,069) — Selling, general and administrative 21,908 19,343 Total costs and expenses 184,354 161,124 Operating loss (13,092) (11,488) Other (expense) income: Interest expense, net (1,910) (1,381) Equity in earnings of investments, net 965 2,992 (Loss) gain on stock in Calavo Growers, Inc. (6,343) 2,150 Other income, net — 405 Total other (expense) income (7,288) 4,166 Loss before income tax benefit (20,380) (7,322) Income tax benefit 6,757 1,852 Net loss (13,623) (5,470) Loss (income) attributable to noncontrolling interest 1,547 (635) Net loss attributable to Limoneira Company $ (12,076) $ (6,105) The following analysis should be read in conjunction with the previous section “Results of Operations.” • Total revenues increased $21.6 million in the twelve months ended July 31, 2020 compared to the twelve months ended July 31, 2019 primarily due to increased agribusiness revenues, particularly increased lemon, avocado and orange sales. • Total costs and expenses increased $23.2 million in the twelve months ended July 31, 2020 compared to the twelve months ended July 31, 2019 primarily due to increases in our agribusiness costs and selling, general and administrative expenses. The increase in agribusiness costs is associated with increased agribusiness production and the increase in selling, general and administrative expenses is primarily attributable to increased administrative personnel, salaries and benefits, and certain corporate expenses associated with our strategic initiatives. • Total other expense increased $11.5 million in the twelve months ended July 31, 2020 compared to the twelve months ended July 31, 2019 primarily due to increased losses on stock in Calavo, decreased equity in earnings of investments and an increase in interest expense, net. • Income tax benefit increased $4.9 million in the twelve months ended July 31, 2020 compared to the twelve months ended July 31, 2019 primarily due to a decrease in income before taxes as a result of decreased operating income and increased total other expense plus discrete items related to the CARES Act. 44 Liquidity and Capital Resources Overview Our liquidity and capital position fluctuates during the year depending on seasonal production cycles, weather events and demand for our products. Typically, our first and last fiscal quarters coincide with the fall and winter months during which we are growing crops that are harvested and sold in the spring and summer, which are our second and third quarters. To meet working capital demand and investment requirements of our agribusiness and real estate development projects and to supplement operating cash flows, we utilize our revolving credit facility to fund agricultural inputs and farm management practices until sufficient returns from crops allow us to repay amounts borrowed. Raw materials needed to propagate the various crops grown by us consist primarily of fertilizer, herbicides, insecticides, fuel and water, all of which are readily available from local sources. Cash Flows from Operating Activities For the nine months ended July 31, 2020, net cash used in operating activities was $11.4 million compared to net cash provided by operating activities of $4.3 million for the nine months ended July 31, 2019. The significant components of our cash flows used in operating activities were as follows: • Net loss for the nine months ended July 31, 2020 was $10.4 million compared to net loss of $2.3 million for the nine months ended July 31, 2019. The components of net loss in the nine months ended July 31, 2020 compared to the same period in fiscal year 2019 consist of a decrease in operating income of $7.6 million, an increase in total other expense of $6.2 million and an increase in income tax benefit of $5.7 million. • The adjustments to reconcile net loss to net cash (used in) provided by operating activities provided $15.4 million of cash in the nine months ended July 31, 2020 compared to providing $7.5 million of cash in the same period in fiscal year 2019, primarily due to significant changes in depreciation and amortization, loss on stock in Calavo and equity in earnings of investments. • The changes in operating assets and liabilities used $16.4 million of operating cash in the nine months ended July 31, 2020 compared to using $0.9 million of operating cash in the same period in fiscal year 2019, primarily due to significant changes in accounts receivable, income tax receivable and accounts payable and growers payable. Cash Flows from Investing Activities For the nine months ended July 31, 2020, net cash provided by investing activities was $0.3 million compared to net cash used in investing activities of $31.4 million during the same period in fiscal year 2019. Net cash provided by investing activities for the nine months ended July 31, 2020 was primarily comprised of proceeds from sale of stock in Calavo, offset by capital expenditures and investments. Capital expenditures were $8.2 million in the nine months ended July 31, 2020, comprised of $7.9 million for property, plant and equipment primarily related to orchard and vineyard development and $0.3 million for real estate development projects. Additionally, in the nine months ended July 31, 2020, we received proceeds from sale of stock in Calavo of $11.0 million, and contributed $2.8 million to the Joint Venture for the development of our East Area I real estate development project. Capital expenditures were $12.6 million in the nine months ended July 31, 2019, comprised of $12.0 million for property, plant and equipment primarily related to orchard and vineyard development and the purchase of a photovoltaic solar array and $0.6 million for real estate development projects. Additionally, in the nine months ended July 31, 2019, we purchased an agriculture property for $0.4 million, contributed $4.0 million to the Joint Venture for the development of our East Area I real estate development project and paid $15.0 million for the Trapani Fresh joint venture formation in Argentina. Additionally, we sold 10,000 shares of Calavo stock for net proceeds of $1.0 million. Cash Flows from Financing Activities For the nine months ended July 31, 2020 and 2019, net cash financing activities was $11.5 million and $27.5 million, respectively. The $11.5 million of cash provided by financing activities during the nine months ended July 31, 2020 was primarily comprised of net borrowings of long-term debt in the amount $16.7 million partially offset by common and preferred dividends, in aggregate, of $4.4 million and purchases of shares of our common stock of $0.6 million under our share repurchase program. The $27.5 million of 45 cash provided by financing activities during the nine months ended July 31, 2019 was primarily comprised of net borrowings of long-term debt in the amount $32.2 million partially offset by common and preferred dividends, in aggregate, of $4.4 million. Transactions Affecting Liquidity and Capital Resources Our Company and Farm Credit West, FLCA (“Farm Credit West”) are parties to that certain Master Loan Agreement (the “Loan Agreement”), dated June 20, 2017, which includes a Revolving Credit Supplement and a Non-Revolving Credit Supplement (together, the “Supplements”). On June 30, 2020, we entered into a Conversion Agreement with Farm Credit West to convert term loans to fixed interest rates effective July 1, 2020. No changes were made to the outstanding principal balances on the term loans and no cash repayments of principal were made by us. The rates are subject to a prepayment restriction period for a portion of the fixed rate term that will expire on January 1, 2021, after which we may prepay any amounts without penalty. In March 2020, we entered into a revolving equity line of credit promissory note and loan agreement with Farm Credit West for a $15.0 million Revolving Equity Line of Credit (the "RELOC") secured by a first lien on the Windfall Investors, LLC property. The RELOC matures in 2043 and features a 3-year draw period followed by 20 years of fully amortized loan payments. The interest rate is variable with monthly interest-only payments during the 3-year draw period and monthly principal and interest payments thereafter. The Supplements and RELOC provide aggregate borrowing capacity of $130.0 million comprised of $75.0 million under the Revolving Credit Supplement, $40.0 million under the Non-Revolving Credit Supplement and $15.0 million under the RELOC. The borrowing capacity based on collateral value was $130.0 million at July 31, 2020. The interest rate for any amount outstanding under the Supplements is based on the one-month London Interbank Offered Rate (“LIBOR”) rate plus an applicable margin, which is subject to adjustment on a monthly basis. The applicable margin ranges from 1.60% to 2.35% depending on the ratio of current assets plus the remaining available commitment divided by current liabilities. On July 1st of each year we have the option to convert the interest rate in use under each Supplement from the preceding LIBOR-based calculation to a variable interest rate, or the reverse, as applicable. Any amounts outstanding under the Supplements are due and payable in full on July 1, 2022. All indebtedness under the Loan Agreement and RELOC with Farm Credit West, including any indebtedness under the Supplements, is secured by a first lien on certain of our agricultural properties in Tulare and Ventura counties in California and certain of our building fixtures and improvements and investments in mutual water companies associated with the pledged agricultural properties. The Loan Agreement includes customary default provisions that provide that should an event of default occur, Farm Credit West, at its option, may declare all or any portion of the indebtedness under the Loan Agreement to be immediately due and payable without demand, notice of non-payment, protest or prior recourse to collateral, and terminate or suspend our right to draw or request funds on any loan or line of credit. The Loan Agreement subjects us to affirmative and restrictive covenants including, among other customary covenants, financial reporting requirements, requirements to maintain and repair any collateral, restrictions on the sale of assets, restrictions on the use of proceeds, prohibitions on the incurrence of additional debt and restrictions on the purchase or sale of major assets of our business. Under the Loan Agreement we are required to comply with a minimum debt service coverage ratio (as calculated in accordance with the Loan Agreement) of 1.25:1.0 measured as of October 31 each year. On May 29, 2020, the Loan Agreement was amended to adjust the debt service ratio to 1.00:1.0 for October 31, 2020. In August 2020, Farm Credit West modified the covenant to defer measurement at October 31, 2020 and revert to a debt service coverage ratio of 1.25:1.0 measured as of October 31, 2021. In February 2020, we received an annual patronage dividend of $1.0 million from Farm Credit West, of which $0.7 million was recorded as a reduction in interest expense and $0.3 million reduced our real estate development assets. In July 2020, Farm Credit West declared an additional annual cash patronage dividend of $0.6 million received in August 2020, of which we recorded $0.4 million as a reduction in interest expense and $0.2 million reduction in our real estate development assets as of July 31, 2020. In April 2020, we entered into a Promissory Note with City National Bank for a $3.6 million loan (the “PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The PPP Loan had a two-year term, an interest rate of 1.0% per annum, and was able to be prepaid at any time prior to maturity with no prepayment penalties. In April 2020, we returned the $3.6 million in proceeds from the PPP Loan. 46 We finance our working capital and other liquidity requirements primarily through cash from operations and our Farm Credit West Credit Facility, which includes the Loan Agreement, Supplements and RELOC. In addition, we have Farm Credit West term loans, the Wells Fargo term loan, the Banco de Chile term loan and a note payable to the sellers of a land parcel. Additional information regarding the Farm Credit West Credit Facility, the Farm Credit West term loans, the Wells Fargo term loan, the Banco de Chile term loan and the note payable can be found in the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. We believe that the cash flows from operations and available borrowing capacity from our existing credit facilities will be sufficient to satisfy our capital expenditures, debt service, working capital needs and other contractual obligations for the next twelve months. In addition, we have the ability to control a portion of our investing cash flows to the extent necessary based on our liquidity demands. Contractual Obligations There have been no material changes to our contractual obligations as disclosed in our fiscal year 2019 Annual Report on Form 10-K, except as follows: In January 2018, the Joint Venture entered into a $45.0 million unsecured Line of Credit Loan Agreement and Promissory Note (the “Loan”) with Bank of America, N.A. to fund early development activities. The Loan originally matured in January 2020 and was extended to February 22, 2021 per the terms thereof. The interest rate on the Loan is LIBOR plus 2.85% and is payable monthly. The Loan contains certain customary default provisions and the Joint Venture may prepay any amounts outstanding under the Loan without penalty. The Joint Venture recorded a $39.4 million outstanding loan balance at July 31, 2020 related to this Loan. The obligations under the Loan are guaranteed by certain principals from Lewis and by us. Fixed Rate and Variable Rate Debt Details of amounts included in long-term debt can be found in the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements As discussed above and in Note 7 – Real Estate Development and Note 8 – Equity in Investments in the notes to consolidated financial statements included in our fiscal year 2019 Annual Report on Form 10-K, we have investments in joint ventures and partnerships that are accounted for using the equity method of accounting. Inflation Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, including in Argentina, could have an adverse impact on our business, financial condition and results of operations. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements in accordance with GAAP requires us to develop critical accounting policies and make certain estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates and judgments on historical experience, available relevant data and other information that we believe to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions as new or additional information become available in future periods. We believe the following critical accounting policies reflect our more significant estimates and judgments used in the preparation of our consolidated financial statements. Changes in Accounting Policies On November 1, 2019, we adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, Leases (as amended, "ASU 2016-02" or the "new lease standard"). A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. We enter into contracts that are, or contain, leases as both a lessee and a lessor. The following accounting policies have been updated as part of the adoption of the new lease standard. 47 Leases Accounting for Operating Leases as a Lessee - In our ordinary course of business, we enter into leases as a lessee generally for agricultural land and packinghouse equipment. We determine if an arrangement is a lease or contains a lease at inception. Operating leases are included in other assets, accrued liabilities and other long-term liabilities on our Consolidated Balance Sheets. Operating lease right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease, measured on a discounted basis. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we have elected to recognize lease expense for these leases on a straight-line basis over the lease term. We have material leases with related parties which are further described in Note 15 - Related-Party Transactions of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. Certain of our agricultural land agreements contain variable costs based on a percentage of the operating results of the leased property. Such variable lease costs are expensed as incurred. These land agreements also contain costs for non-lease components such as water usage. We account for the lease and non-lease components separately. For all other agreements, we generally combine lease and non-lease components in calculating the ROU assets and lease liabilities. See Note 13 - Leases of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information. Accounting for Leases as a Lessor - Leases in which we act as the lessor include land and residential and commercial units and are all classified as operating leases. Certain of our contracts contain variable income based on a percentage of the operating results of the leased asset. Certain of our contracts contain non-lease components such as water, utilities and common area services. We have elected to not separate lease and non-lease components for our lessor arrangements and the combined component is accounted for entirely under ASC 842. The underlying asset in an operating lease arrangement is carried at depreciated cost within Property, plant and equipment, net on the consolidated balance sheets. Depreciation is calculated using the straight-line method over the useful life of the underlying asset. We recognize operating lease revenue on a straight-line basis over the lease term. Revenue Recognition - We account for our agribusiness revenue in accordance with ASC 606, Revenue from Contracts with Customers. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: • Identify the contract(s) with a customer; • Identify the performance obligations in the contract; • Determine the transaction price; • Allocate the transaction price to the performance obligations in the contract; and • Recognize revenue when (or as) the entity satisfies a performance obligation. We determine the appropriate method by which we recognize revenue by analyzing the nature of the products or services being provided as well as the terms and conditions of contracts or arrangements entered into with our customers. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A contract's transaction price is allocated to each distinct good or service (i.e., performance obligation) identified in the contract and each performance obligation is valued based on its estimated relative standalone selling price. We recognize the majority of our revenue at a point in time when we satisfy a performance obligation and transfer control of the product to the respective customer. The amount of revenue that is recognized is based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as allowances for estimated customer discounts or concessions, where applicable. The amount of variable consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Agribusiness revenue - Revenue from lemon sales is generally recognized at a point in time when the customer takes control of the fruit from our packinghouse which aligns with the transfer of title to the customer. We have elected to treat any shipping and handling costs incurred after control of the goods has been transferred to the customer as agribusiness costs. 48 Our avocados, oranges, specialty citrus and other specialty crops are packed and sold by Calavo and other third-party packinghouses. We deliver the majority of our avocado production from our orchards to Calavo. These avocados are then packed by Calavo at its packinghouse and sold and distributed under Calavo brands to its customers primarily in the United States and Canada. Our arrangements with other third-party packinghouses related to our oranges, specialty citrus and other specialty crops are similar to our arrangement with Calavo. Our arrangements with our third-party packinghouses are such that we are the producer and supplier of the product and the third-party packinghouses are our customers. The revenues we recognize related to the fruits sold to the third-party packinghouses are based on the volume and quality of the fruits delivered, the market price for such fruit, less the packinghouses’ charges to pack and market the fruit. Such packinghouse charges include the grading, sizing, packing, cooling, ripening and marketing of the related fruit. We control the product until it is delivered to the third-party packinghouses at which time control of the product is transferred to the third-party packinghouses and revenue is recognized. Such third-party packinghouse charges are recorded as a reduction of revenue as they are not for distinct services. The identifiable benefit we receive from the third-party packinghouses for packaging and marketing services cannot be sufficiently separated from the third-party packinghouses’ purchase of our products. In addition, we are not able to reasonably estimate the fair value of the benefit received from the third-party packinghouses for such services and as such, these costs are characterized as a reduction of revenue in our consolidated statements of operations. Revenue from the sales of certain of our agricultural products is recorded based on estimated proceeds provided by certain of our sales and marketing partners (Calavo and other third-party packinghouses) due to the time between when the product is delivered by us and the closing of the pools for such fruits at the end of each month or harvest period. Calavo and other third-party packinghouses are agricultural cooperatives or function in a similar manner as an agricultural cooperative. We estimate the variable consideration using the most likely amount method, with the most likely amount being the quantities actually shipped extended by the prices reported by Calavo and other third-party packinghouses. Revenue is recognized at time of delivery to the packinghouses relating to fruits that are in pools that have not yet closed at month end if: (a) the related fruits have been delivered to and accepted by Calavo and other third-party packinghouses (i.e., Calavo and other third-party packinghouses obtain control) and (b) sales price information has been provided by Calavo and other third-party packinghouses (based on the marketplace activity for the related fruit) to estimate with reasonable certainty the final selling price for the fruit upon the closing of the pools. In such instances, we have the present right to payment and Calavo and other third-party packinghouses have the present right to direct the use of, and obtain substantially all of the remaining benefits from, the delivered fruit. We do not expect that there is a high likelihood that a significant reversal in the amount of cumulative revenue recognized in the early periods of the pool will occur once the final pool prices have been reported by the packinghouses. Historically, the revenue that is recorded based on the sales price information provided to us by Calavo and other third-party packinghouses at the time of delivery, have not materially differed from the actual amounts that are paid after the monthly or harvest period pools are closed. We have entered into brokerage arrangements with third-party international packinghouses. In these arrangements, we have the exclusive ability to direct the use of, and obtain substantially all of the remaining benefits from the fruit, and are therefore acting as a principal. As such, we record the related revenue and costs of the fruit gross in the consolidated statement of operations. Revenue from crop insurance proceeds is recorded when the amount can be reasonably determined and upon establishment of the present right to payment. Real Estate Development Costs - We capitalize the planning, entitlement, construction and development costs associated with our various real estate projects. Costs that are not capitalized, which include property maintenance and repairs, general and administrative and marketing expenses, are expensed as incurred. A real estate development project is considered substantially complete upon the cessation of construction and development activities. Once a project is substantially completed, future costs are expensed as incurred. Costs incurred to sell the real estate are evaluated for capitalization in accordance with ASC 340-40, and incremental costs of obtaining a contract and costs to fulfill a contract are capitalized only if the costs relate directly to a specifically identified contract, enhance resources to satisfy performance obligations in the future and are expected to be recovered. Financing and payment - Our payment terms vary by the type and location of our customer and the products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 60 days from date of shipment or satisfaction of the performance obligation. We do not provide financing with extended payment terms beyond generally standard commercial payment terms for the applicable industry. Practical expedients and exemptions - Taxes collected from customers and remitted to government authorities and that are related to the sales of our products are excluded from revenues. 49 We do not disclose the value of unsatisfied performance obligations for (i) contracts with original expected lengths of one year or less or (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for the services performed. Foreign Currency Translation - PDA and San Pablo’s functional currency is the Chilean Peso. Their balance sheets are translated to U.S. dollars at exchange rates in effect at the balance sheet dates and their income statements are translated at average exchange rates during the reporting period. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income. Income Taxes - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Business Combinations and Asset Acquisitions - Business combinations are accounted for under the acquisition method in accordance with ASC 805, Business Combinations. The acquisition method requires identifiable assets acquired and liabilities assumed and any noncontrolling interest in the business acquired be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Acquisitions that do not meet the definition of a business under the ASC are accounted for as asset acquisitions. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets acquired and liabilities assumed on a relative fair value basis. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative fair value basis. Transaction costs are expensed in a business combination and are considered a component of the cost of the acquisition in an asset acquisition. Impairment of Long-Lived Assets - We evaluate our long-lived assets including our real estate development projects for impairment when events or changes in circumstances indicate the carrying value of these assets may not be recoverable. Defined Benefit Retirement Plan - As discussed in the notes to our consolidated financial statements, we sponsor a defined benefit retirement plan that was frozen in June 2004, and no future benefits accrued to participants subsequent to that time. Ongoing accounting for this plan under FASB ASC 715 provides guidance as to, among other things, future estimated pension expense, pension liability and minimum funding requirements. Third-party actuarial consultants provide this information to us. In developing this data, certain estimates and assumptions are used, including among other things, discount rate, long-term rate of return and mortality tables. During 2019, the Society of Actuaries (“SOA”) released a new mortality improvement scale table, referred to as MP-2019, which is believed to better reflect mortality improvements and is to be used in calculating defined benefit pension obligations. In addition, during fiscal year 2019, the assumed discount rate to measure the pension obligation decreased to 3.0%. We used the latest mortality tables released by the SOA through October 2019 to measure our pension obligation as of October 31, 2019 and combined with the assumed discount rate and other demographic assumptions, our pension liability increased by approximately $0.6 million as of October 31, 2019. Further changes in any of these estimates could materially affect the amounts recorded that are related to our defined benefit retirement plan. Recent Accounting Pronouncements See Note 2 – "Summary of Significant Accounting Policies" of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for information concerning recent accounting pronouncements. 50