Limoneira CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Limoneira Company, a Delaware corporation, is 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 6,000 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 256 completed rental units and another approximately 1,100 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, which includes oranges, specialty citrus and other crops. The agribusiness division 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 Summary We market and sell lemons directly to our food service, wholesale and retail customers throughout the United States, Canada, Asia, Australia and certain other international markets. We are one of the largest growers of lemons and avocados in the United States. 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. Historically, our agribusiness division has been seasonal in nature with quarterly revenue fluctuating depending on the timing and variety of crops being harvested. Cultural costs in our agribusiness division 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. 23 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. Rental Operations Summary Our rental operations division includes our residential and commercial rentals, leased land operations and organic recycling. Our residential rental units generate reliable cash flows that we use to partially fund the operating costs of our business and provide affordable housing to many of our employees, including our agribusiness employees. This unique employment benefit 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. Real Estate Development Summary We invest in real estate investment projects and 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, 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. 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 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 and water from local water districts in Tulare County and ground water in San Bernardino County. Following our acquisition of Associated Citrus Packers, Inc. ("Associated"), we began using federal project water in Arizona from the Colorado River through the YMIDD. We also have acquired water rights in Chile related to our acquisitions of PDA and San Pablo and in Argentina related to our acquisition of Trapani Fresh. 24 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 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 experienced below average precipitation since 2018 and according to the U.S. Drought Monitor, California is experiencing moderate drought conditions as of January 31, 2021. 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 2017 through 2020 compared to 75% in 2016 and zero in 2015 and 2014. 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 398 units from inception through January 31, 2021, including 44 units in the first quarter of fiscal year 2021. For further information see Note 5 – Real Estate Development of the notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. In December 2020, we received $5.0 million of federal income tax refunds related to the Coronavirus Aid Relief and Economic Security Act and we expect to receive an additional $0.9 million of California state refunds in fiscal year 2021. 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 fiscal year 2020, we purchased 250,977 shares under the share repurchase program for approximately $3.5 million. As of January 31, 2021, the remaining authorization under this program is approximately $6.5 million. On December 15, 2020, we declared a cash dividend of $0.075 per common share paid on January 15, 2021, in the aggregate amount of $1.3 million to stockholders of record as of December 28, 2020. COVID-19 Pandemic The global spread of the novel coronavirus (COVID-19) in the past year 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 2020, 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 fiscal year 2020, which we believe was a result of the COVID-19 pandemic, negatively impacted our sales and profitability for the second, third and fourth quarters of fiscal year 2020 and in the first quarter of fiscal year 2021. 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, but not limited, to those presented in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended October 31, 2020. Although subject to unforeseen changes that may arise as the COVID-19 pandemic continues to unfold, we currently expect improvement in the second half of fiscal year 2021. 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 the spring of 25 2020, we allowed personnel to work remotely to the extent possible. While we believe we have responded appropriately to mitigate the impacts of the COVID-19 pandemic, as the situation evolves, 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. In addition, in February 2021 the COVID-19 vaccine was offered to our employees. Given the economic uncertainty as a result of the COVID-19 pandemic over the past year, 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 fiscal year 2021 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. 26 Results of Operations The following table shows the results of operations (in thousands): Three Months Ended January 31, 2021 2020 Revenues: Agribusiness $ 37,137 $ 40,483 Other operations 1,138 1,173 Total net revenues 38,275 41,656 Costs and expenses: Agribusiness 36,938 42,543 Other operations 1,082 1,269 Selling, general and administrative 5,895 6,310 Total costs and expenses 43,915 50,122 Operating (loss) income: Agribusiness 199 (2,060) Other operations 56 (96) Selling, general and administrative (5,895) (6,310) Operating loss (5,640) (8,466) Other income (expense): Interest income 43 225 Interest expense, net of dividends 134 (170) Equity in earnings (losses) of investments, net 366 (120) Loss on stock in Calavo Growers, Inc. — (2,024) Other (expense) income, net (6) 515 Total other income (expense) 537 (1,574) Loss before income tax benefit (5,103) (10,040) Income tax benefit 1,187 3,136 Net loss (3,916) (6,904) Net (income) loss attributable to noncontrolling interest (292) 477 Net loss attributable to Limoneira Company $ (4,208) $ (6,427) 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 gain or loss on stock in Calavo and sale and disposal of property assets when applicable, is an important measure to evaluate our results of operations between periods on a more comparable basis. Adjusted EBITDA in previous periods also excluded LLCB earnings in equity investment which is no longer excluded due to management’s anticipation of future cash distributions related to the investment in LLCB. Adjusted EBITDA for prior periods has been restated to conform to the current presentation. 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): 27 Three Months Ended January 31, 2021 2020 Net loss attributable to Limoneira Company $ (4,208) $ (6,427) Interest income (43) (225) Interest expense, net of dividends (134) 170 Income tax benefit (1,187) (3,136) Depreciation and amortization 2,501 2,565 EBITDA $ (3,071) $ (7,053) Loss on stock in Calavo Growers, Inc. — 2,024 Adjusted EBITDA $ (3,071) $ (5,029) Three Months Ended January 31, 2021 Compared to the Three Months Ended January 31, 2020 Revenues Total net revenues for the first quarter of fiscal year 2021 were $38.3 million compared to $41.7 million for the same period of fiscal year 2020. The 8% decrease of $3.4 million was primarily the result of decreased agribusiness revenues, as detailed below ($ in thousands): Agribusiness Revenues for the Three Months Ended January 31, 2021 2020 Change Lemons $ 34,197 $ 36,151 $ (1,954) (5)% Avocados — 168 (168) (100)% Oranges 1,091 2,272 (1,181) (52)% Specialty citrus and other crops 1,849 1,892 (43) (2)% Agribusiness revenues $ 37,137 $ 40,483 $ (3,346) (8)% • Lemons: The decrease in the first quarter of fiscal year 2021 was primarily the result of lower prices partially offset by increased volume of fresh lemons sold compared to the same period in fiscal year 2020. During the first quarter of fiscal years 2021 and 2020, fresh lemon sales were $25.0 million and $27.0 million, 1,320,000 and 1,280,000 cartons of lemons sold at average per carton prices of $18.91 and $21.12, 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 first quarter of fiscal year 2021 compared to the same period in fiscal year 2020. Lemon revenues in the first quarter of fiscal years 2021 and 2020 included $4.9 million and $4.1 million shipping and handling, $0.8 million and $1.0 million lemon by-products and $3.5 million and $4.0 million other lemon sales, respectively. • Avocados: Due to harvest timing, no sales were recorded in the first quarter of fiscal year 2021 compared to sales of 125,000 pounds of avocados at an average per pound price of $1.34 in the first quarter of fiscal year 2020. • Oranges: The decrease in the first quarter of fiscal year 2021 was primarily the result of decreased volume of oranges sold partially offset by higher prices compared to the same period in fiscal year 2020. In the first quarter of fiscal years 2021 and 2020, we sold 119,000 and 196,000 40-pound carton equivalents of oranges at an average per carton price of $9.17 and $6.71, respectively. Additionally, the fiscal year 2020 revenues included $0.1 million in Chile and $0.9 million of oranges purchased for resale. • Specialty citrus and other crops: The slight decrease in the first quarter of fiscal year 2021 was primarily the result of decreased volume partially offset by increased prices of specialty citrus sold compared to the same period in fiscal year 2020. During the first quarter of fiscal years 2021 and 2020, we sold 115,000 and 139,000 40-pound carton equivalents of specialty citrus at an average per carton price of $15.46 and $13.61, respectively. Rental operations revenue in the first quarter of fiscal year 2021 was similar to the first quarter of fiscal year 2020. 28 Costs and Expenses Our total costs and expenses in the first quarter of fiscal year 2021 were $43.9 million compared to $50.1 million in the same period of fiscal year 2020. The 12% decrease of $6.2 million was primarily attributable to decreases in our agribusiness costs partially offset by increased packing costs. Costs and expenses associated with our agribusiness include packing costs, harvest costs, growing costs, costs related to the fruit we procure and sell for third-party growers and depreciation and amortization expense, as detailed below ($ in thousands): Agribusiness Costs and Expenses for the Three Months Ended January 31, 2021 2020 Change Packing costs $ 10,377 $ 9,156 $ 1,221 13% Harvest costs 4,923 6,248 (1,325) (21)% Growing costs 8,112 9,779 (1,667) (17)% Third-party grower costs 11,314 15,076 (3,762) (25)% Depreciation and amortization 2,212 2,284 (72) (3)% Agribusiness costs and expenses $ 36,938 $ 42,543 $ (5,605) (13)% • 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 first quarter of fiscal years 2021 and 2020, lemon packing costs were $9.5 million and $8.6 million, respectively. During the first quarter of fiscal years 2021 and 2020, we packed and sold 1,320,000 and 1,280,000 cartons of lemons at average per carton costs of $7.22 and $6.70, respectively. Additionally, packing costs included $0.8 million and $0.6 million of shipping costs in the first quarter of fiscal years 2021 and 2020, respectively. • Harvest costs: The decrease in the first quarter of fiscal year 2021 was primarily the result of decreased volume of avocados, oranges and specialty citrus harvested compared to the same period in fiscal year 2020. • 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 decrease in the first quarter of fiscal year 2021 was primarily due to farm management decisions based on weather, harvest timing and crop conditions. • Third-party grower costs: We sell lemons that we grow and lemons that we procure from other growers. The cost of procuring lemons from other growers is referred to as third-party grower costs. The decrease in the first quarter of fiscal year 2021 was primarily due to lower prices and decreased volume of third-party grower lemons sold compared to the same period of fiscal year 2020. Of the 1,320,000 and 1,280,000 cartons of lemons packed and sold during the first quarter of fiscal years 2021 and 2020, 637,000 (48%) and 706,000 (55%) were procured from third-party growers at average per carton prices of $14.63 and $16.58, respectively. Additionally, in the first quarter of fiscal year 2021 and 2020 we incurred $2.0 million and $3.4 million, respectively of costs for purchased, packed fruit for resale. • Depreciation and amortization: Depreciation and amortization expense for the first quarter of fiscal year 2021 was approximately $0.1 million lower than the same period of fiscal year 2020. Other operations expenses were $1.1 million and $1.3 million in the first quarter of fiscal years 2021 and 2020, respectively. Selling, general and administrative costs and expenses were $5.9 million in the first quarter of fiscal year 2021 compared to $6.3 million in the first quarter of fiscal year 2020. The 7% decrease of $0.4 million primarily consisted of the following: • Labor, benefits and incentive compensation for the first quarter of fiscal year 2021 were $0.4 million lower than the first quarter of fiscal year 2020. • Training, depreciation and other costs associated with an ERP software implementation for the first quarter of fiscal year 2021 were $0.3 million lower than the first quarter of fiscal year 2020. • General and administrative expenses, including certain corporate overhead expenses for the first quarter of fiscal year 2021 were $0.1 million lower than the first quarter of fiscal year 2020. • Audit, audit-related and income tax fees for the first quarter of fiscal year 2021 were $0.4 million higher than the first quarter of fiscal year 2020. 29 Other Income (Expense) Other income for the three months ended January 31, 2021 was comprised primarily of $0.4 million of equity in earnings of investments and $0.2 million of net interest income. Other expense for the three months ended January 31, 2020 was comprised primarily of $2.0 million loss on stock in Calavo Growers, Inc. partially offset by $0.1 million of net interest income and $0.2 million of dividend income received from Calavo. Income Taxes We recorded an estimated income tax benefit of $1.2 million and $3.1 million in the first quarter of fiscal years 2021 and 2020 on pre-tax loss of $5.1 million and $10.0 million, respectively. The tax benefit recorded for the first quarter of fiscal year 2021 differs from the U.S. federal statutory tax rate of 21.0% due primarily to foreign jurisdictions which are taxed at different rates, state taxes, and nondeductible tax items. Our projected annual effective blended tax rate for fiscal year 2021, excluding discrete items, is approximately 24.8%. Net (Income) Loss Attributable to Noncontrolling Interest Net (income) loss attributable to noncontrolling interest represents 10% and 49% of the net (income) loss 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 18 - 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 January 31, 2021 Compared to the Three Months Ended January 31, 2020 The following table shows the segment results of operations for the three months ended January 31, 2021 (in thousands): Fresh Lemons Lemon Packing Eliminations Avocados Other Agribusiness Total Agribusiness Corporate and Other Total Revenues from external customers $ 29,300 $ 4,897 $ — $ — $ 2,940 $ 37,137 $ 1,138 $ 38,275 Intersegment revenue — 6,685 (6,685) — — — — — Total net revenues 29,300 11,582 (6,685) — 2,940 37,137 1,138 38,275 Costs and expenses 29,507 9,531 (6,685) — 2,373 34,726 6,688 41,414 Depreciation and amortization — — — — — 2,212 289 2,501 Operating (loss) income $ (207) $ 2,051 $ — $ — $ 567 $ 199 $ (5,839) $ (5,640) The following table shows the segment results of operations for the three months ended January 31, 2020 (in thousands): Fresh Lemons Lemon Packing Eliminations Avocados Other Agribusiness Total Agribusiness Corporate and Other Total Revenues from external customers $ 32,057 $ 4,094 $ — $ 168 $ 4,164 $ 40,483 $ 1,173 $ 41,656 Intersegment revenue — 7,105 (7,105) — — — — — Total net revenues 32,057 11,199 (7,105) 168 4,164 40,483 1,173 41,656 Costs and expenses 34,351 8,609 (7,105) 473 3,931 40,259 7,298 47,557 Depreciation and amortization — — — — — 2,284 281 2,565 Operating (loss) income $ (2,294) $ 2,590 $ — $ (305) $ 233 $ (2,060) $ (6,406) $ (8,466) 30 The following analysis should be read in conjunction with the previous section “Results of Operations.” Fresh Lemons Fresh lemons segment revenue is comprised of sales of fresh lemons, lemon by-products and other lemon revenue such as purchased, packed fruit for resale. For the first quarter of fiscal years 2021 and 2020, our fresh lemons segment total net revenues were $29.3 million and $32.1 million, respectively. The 9% decrease of $2.8 million was primarily due to decreases in fresh lemon carton sales of $2.1 million, lemon by-products of $0.2 million and brokerage and other sales of $0.5 million. Costs and expenses associated with our fresh lemons segment include harvest costs, growing costs and costs of lemons we procure from third-party growers. For the first quarter of fiscal years 2021 and 2020, our fresh lemons segment costs and expenses were $29.5 million and $34.4 million, respectively. The 14% decrease of $4.8 million primarily consisted of the following: • Harvest costs for the first quarter of fiscal year 2021 were $1.1 million lower than the same period of fiscal year 2020. • Growing costs for the first quarter of fiscal year 2021 were $0.7 million lower than the same period of fiscal year 2020. • Third-party grower costs for the first quarter of fiscal year 2021 were $2.9 million lower than the same period of fiscal year 2020. • Transportation costs for the first quarter of fiscal year 2021 were $0.3 million higher than the same period of fiscal year 2020. • Intersegment costs and expenses for the first quarter of fiscal year 2021 were $0.4 million lower than the same period of fiscal year 2020. Lemon Packing Lemon packing segment revenue is comprised of intersegment packing revenue and shipping and handling revenue. For the first quarter of fiscal years 2021 and 2020, our lemon packing segment total net revenues were $11.6 million and $11.2 million, respectively. The 3% increase of $0.4 million was primarily due to increased volume of lemons packed and sold. 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 quarter of fiscal years 2021 and 2020, our lemon packing costs and expenses were $9.5 million and $8.6 million, respectively. The 11% increase of $0.9 million was primarily due to increased volume of lemons packed at higher average per carton costs. For the first quarter of fiscal years 2021 and 2020, lemon packing segment operating income per carton sold was $1.55 and $2.02, respectively. In the first quarter of fiscal years 2021 and 2020, the lemon packing segment included $6.7 million and $7.1 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 quarter of fiscal year 2021, our avocados segment had no revenues, compared to $0.2 million in the same period of fiscal year 2020. Costs and expenses associated with our avocados segment include harvest and growing costs. For the first quarter of fiscal years 2021 and 2020, our avocados segment costs and expenses were zero and $0.5 million, respectively. The 100% decrease of $0.5 million primarily consisted of growing costs. Other Agribusiness For the first quarter of fiscal years 2021 and 2020, our other agribusiness segment total net revenues were $2.9 million and $4.2 million, respectively. The 29% decrease of $1.2 million primarily consisted of the following: • Orange revenues for the first quarter of fiscal year 2021 were $1.2 million lower than the same period of fiscal year 2020. • Specialty citrus and other crops revenues for the first quarter of fiscal year 2021 were similar to the same period of fiscal year 2020. 31 Costs and expenses associated with our other agribusiness segment include harvest costs, growing costs and purchased fruit costs. For the first quarter of fiscal years 2021 and 2020, our other agribusiness costs and expenses were $2.4 million and $3.9 million, respectively. The 40% decrease of $1.6 million primarily consisted of the following: • Harvest costs for the first quarter of fiscal year 2021 were $0.2 million lower than the same period of fiscal year 2020. • Growing costs for the first quarter of fiscal year 2021 were $0.5 million lower than the same period of fiscal year 2020. • Purchased fruit costs for the first quarter of fiscal year 2021 were $0.9 million lower than the same period of fiscal year 2020. Total agribusiness depreciation and amortization expenses for the first quarter of fiscal year 2021 were $0.1 million lower than the same period of fiscal year 2020. Corporate and Other Our corporate and other operations had revenues of approximately $1.1 million and $1.2 million for the first quarter of fiscal years 2021 and 2020. Costs and expenses in our corporate and other operations for the first quarter of fiscal years 2021 and 2020 were approximately $6.7 million and $7.3 million, respectively, and include selling, general and administrative costs and expenses not allocated to the operating segments. Depreciation and amortization expenses for the first quarter of fiscal years 2021 and 2020 were similar at approximately $0.3 million. 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. 32 Results of Operations for the Trailing Twelve Months Ended January 31, 2021 and 2020 The following table shows the unaudited results of operations (in thousands): Trailing Twelve Months Ended January 31, 2021 2020 Revenues: Agribusiness $ 156,591 $ 166,232 Other operations 4,587 4,804 Total revenues 161,178 171,036 Costs and expenses: Agribusiness 151,676 155,999 Other operations 4,317 4,601 Loss on sale and disposal of property assets 502 — Selling, general and administrative 20,865 22,465 Total costs and expenses 177,360 183,065 Operating loss (16,182) (12,029) Other (expense) income: Interest income 180 393 Interest expense, net of dividends (1,744) (2,619) Equity in earnings of investments, net 825 2,911 Loss on stock in Calavo Growers, Inc. (4,275) (231) Other (expense) income, net (302) 340 Total other (expense) income (5,316) 794 Loss before income tax benefit (21,498) (11,235) Income tax benefit 6,545 2,472 Net loss (14,953) (8,763) Loss attributable to noncontrolling interest 737 17 Net loss attributable to Limoneira Company $ (14,216) $ (8,746) The following analysis should be read in conjunction with the previous section “Results of Operations.” • Total revenues decreased $9.9 million in the twelve months ended January 31, 2021 compared to the twelve months ended January 31, 2020 primarily due to decreased agribusiness revenues, particularly decreased lemon sales. • Total costs and expenses decreased $5.7 million in the twelve months ended January 31, 2021 compared to the twelve months ended January 31, 2020 primarily due to decreases in our agribusiness costs and selling, general and administrative expenses offset by increase in the loss on sale and disposal of property assets. The decrease in agribusiness costs is associated with decreased agribusiness production and the decrease in selling, general and administrative expenses is primarily attributable to decreased administrative personnel, salaries and benefits, and certain corporate expenses associated with our strategic initiatives. • Total other expense increased $6.1 million in the twelve months ended January 31, 2021 compared to the twelve months ended January 31, 2020 primarily due to increased loss on stock in Calavo and decreased equity in earnings of investments. • Income tax benefit increased $4.1 million in the twelve months ended January 31, 2021 compared to the twelve months ended January 31, 2020 primarily due to the increase in pre-tax loss of $10.3 million. 33 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 three months ended January 31, 2021 and 2020, net cash used in operating activities was $1.8 million and $12.2 million, respectively. The significant components of our cash flows used in operating activities were as follows: • Net loss for the three months ended January 31, 2021 was $3.9 million compared to net loss of $6.9 million for the three months ended January 31, 2020. The components of net loss in the three months ended January 31, 2021 compared to the same period in fiscal year 2020 consist of a decrease in operating loss of $2.8 million, an increase in total other income of $2.1 million and a decrease in income tax benefit of $1.9 million. • The adjustments to reconcile net loss to net cash used in operating activities provided $2.3 million of cash in the three months ended January 31, 2021 compared to providing $2.2 million of cash in the same period in fiscal year 2020, primarily due to significant changes in deferred income taxes, loss on stock in Calavo and equity in earnings of investments. • The changes in operating assets and liabilities used $0.2 million of operating cash in the three months ended January 31, 2021 compared to using $7.5 million of operating cash in the same period in fiscal year 2020, primarily due to significant changes in accounts receivable and receivables/other from related parties, income taxes receivable and accounts payable and growers payable. Cash Flows from Investing Activities For the three months ended January 31, 2021 and 2020, net cash used in investing activities was $3.6 million and $6.5 million, respectively. Net cash used in investing activities for the three months ended January 31, 2021 was primarily comprised of capital expenditures and investments. • Capital expenditures were $3.4 million in the three months ended January 31, 2021, comprised of $3.1 million for property, plant and equipment primarily related to orchard and vineyard development and $0.3 million for real estate development projects. • Capital expenditures were $3.7 million in the three months ended January 31, 2020, comprised of $3.5 million for property, plant and equipment primarily related to orchard and vineyard development and $0.2 million for real estate development projects. Additionally, in the three months ended January 31, 2020, we contributed $2.8 million to the Joint Venture for the development of our East Area I real estate development project. Cash Flows from Financing Activities For the three months ended January 31, 2021 and 2020, net cash provided by financing activities was $6.7 million and $19.1 million, respectively. • The $6.7 million of cash provided by financing activities during the three months ended January 31, 2021 was primarily comprised of net borrowings of long-term debt in the amount $8.8 million partially offset by common and preferred dividends, in aggregate, of $1.4 million. • The $19.1 million of cash provided by financing activities during the three months ended January 31, 2020 was primarily comprised of net borrowings of long-term debt in the amount $20.7 million partially offset by common and preferred dividends, in aggregate, of $1.5 million. 34 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 were subject to a prepayment restriction period for a portion of the fixed rate term that expired 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 January 31, 2021. 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. 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. We expect to be in compliance with these covenants in fiscal year 2021. In February 2021, we received an annual patronage dividend of $1.2 million from Farm Credit West, of which $0.8 million was recorded as a reduction in interest expense and $0.4 million reduced our real estate development assets in the first quarter of fiscal year 2021. 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 the Farm Credit West term loans, Wells Fargo term loan, Banco de Chile term loan and COVID-19 loans, and a note payable to the sellers of a land parcel. Additional information regarding the Farm Credit West Credit Facility, Farm Credit West term loans, Wells Fargo term loan, Banco de Chile term loan and COVID-19 loans 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. 35 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 2020 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 $17.4 million outstanding loan balance at January 31, 2021 related to this Loan. The obligations under the Loan are guaranteed by certain principals from Lewis and by us. In February 2021, this loan was extended to February 22, 2023 with an option to extend to February 22, 2024, subject to certain conditions. 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 in Note 7 – Real Estate Development and Note 8 – Equity in Investments of the notes to consolidated financial statements included in our fiscal year 2020 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. Revenue Recognition - The core principle of the guidance 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. • Recognize revenue when (or as) the entity satisfies a performance obligation. We determined 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. 36 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. Our avocados, oranges, specialty citrus and other specialty crops are packed and sold by Calavo and other third-party packinghouses. 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. 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. Revenue from crop insurance proceeds is recorded when the amount can be reasonably determined and upon establishment of the present right to payment. Rental Operations Revenue - Minimum rental revenues are generally recognized on a straight-line basis over the respective initial lease term. Contingent rental revenues are contractually defined as to the percentage of rent received by us and are based on fees collected by the lessee. Such revenues are recognized when actual results, based on collected fees reported by the tenant, are received. Our rental arrangements generally require payment on a monthly or quarterly basis. 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. 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. 37 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 have accrued subsequent to that time. Ongoing accounting for this plan under FASB ASC 715, Compensation – Retirement Benefits , provides guidance as to, among other things, future estimated pension expense, pension liability and minimum funding requirements. This information is provided to us by third-party actuarial consultants. In developing this data, certain estimates and assumptions are used, including among other things, discount rate, long-term rate of return on assets and mortality tables. During 2020, the Society of Actuaries (SOA) released a new mortality improvement scale table, referred to as MP-2020, which is believed to better reflect mortality improvements and is to be used in calculating defined benefit pension obligations. In addition, during fiscal year 2020, the assumed discount rate to measure the pension obligation decreased to 2.5%. We used the latest mortality tables released by the SOA through October 2020 to measure our pension obligation as of October 31, 2020 and combined with the assumed discount rate and other demographic assumptions, our pension liability increased by approximately $0.5 million as of October 31, 2020. 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. 38 Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in the disclosures discussed in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020 as filed with the SEC on January 14, 2020.