ALICO, INC. annual report, FY2011

Business Context and Reporting Period

Alico, Inc. is a Florida agribusiness and land-management company operating approximately 130,400 acres across five Florida counties. Its principal activities are citrus cultivation, sugarcane and other farmland operations, cattle, land leasing, conservation, and agricultural supply-chain services through Alico Fruit. This Form 10-K covers the fiscal year ended September 30, 2012, not 2011 Q4 as indicated in the request metadata.

Citrus Groves: 17,400 gross acres and approximately 95% of citrus sales to processed markets.
Improved Farmland: 44,100 acres, including approximately 30,600 sugarcane acres.
Ranch and Conservation: 67,400 acres and a breeding herd of approximately 7,328 cows and bulls.
Alico had 157 full-time employees at September 30, 2012.

Financial Performance and Key Metrics

Metric	FY2012	FY2011	Change
Operating revenue	$127.2 million	$98.6 million	+29.0%
Gross profit	$32.2 million	$23.4 million	+37.5%
Gross margin	25.3%	23.8%	+1.5 percentage points
Income from operations	$23.7 million	$15.2 million	+55.8%
Net income	$18.5 million	$7.1 million	+160.5%
Basic and diluted EPS	$2.51	$0.96	+161.5%
Cash flow from operations	$23.6 million	$16.7 million	+41.1%
Capital expenditures	$15.9 million	$12.3 million	+29.8%
Long-term debt and current portion	$39.9 million	$57.2 million	-$17.3 million

FY2012 gross margin was calculated from reported operating revenue and gross profit. The filing identifies citrus and sugarcane production growth, higher agricultural pricing, and increased Alico Fruit sales as the primary revenue drivers.

Citrus Groves revenue increased 17.7% to $55.4 million; gross profit increased 26.5% to $24.4 million.
Alico Fruit revenue increased 33.9% to $48.3 million, but gross profit declined 36.3% to $641,000 because of higher harvest, hauling, repair, and maintenance costs.
Sugarcane revenue increased 85.3% to $14.4 million; gross profit increased 244.6% to $3.3 million. Production rose approximately 65% to 338,552 net standard tons.
Cattle revenue increased 27.8% to $5.9 million, primarily from higher prices; gross profit increased 88.6% to $2.7 million.
Citrus production increased to 4.635 million boxes and 29.07 million pound solids from 4.062 million boxes and 24.177 million pound solids in FY2011.

Liquidity, Debt, and Cash Flow

Cash and cash equivalents were $13.3 million at September 30, 2012, compared with $1.3 million at September 30, 2011. The balance sheet also included $2.5 million of restricted cash related to a land sale deposit.
Working capital increased to $34.3 million from $17.4 million, and the current ratio increased to approximately 3.0:1 from 2.47:1.
Operating cash flow was $23.6 million. Investing activities provided $7.7 million, primarily from property sales and distributions from the Magnolia Fund. Financing activities used $19.3 million, principally for debt repayments, dividends, and treasury-stock purchases.
The $60 million revolving credit facility had no outstanding balance at September 30, 2012, leaving $60 million available. The term loan balance was $38.0 million and the Farm Credit mortgage balance was approximately $1.9 million.
The credit facility requires a minimum current ratio of 1.50:1, debt ratio no greater than 60%, tangible net worth of at least $80 million, and minimum debt coverage of 1.15:1. The company reported compliance at year-end.
Capital expenditures are expected to be approximately $15 million in fiscal 2013, according to management.

Material Changes Versus the Prior Comparable Period

Revenue, gross profit, operating income, net income, EPS, and operating cash flow all increased materially from FY2011.
Debt declined by approximately $17.3 million, primarily through repayment of the revolving line of credit and other notes.
The company recorded a $9.1 million pretax gain on the sale of two Polk County properties and a $1.9 million impairment charge on Lee County property held for sale.
Interest expense declined 20.0% to $1.6 million because of lower debt balances and slightly lower average interest rates.
The quarterly dividend policy was reinstated. Dividends declared increased to $0.24 per share from $0.12 per share in FY2011.
The former real estate segment was being wound down, and the company terminated its vegetable operations in FY2010.

Guidance, Outlook, Risks, and Unusual Items

Management expects internally generated funds and the existing credit facility to satisfy foreseeable working-capital and capital-expenditure requirements.
Alico entered into an agreement with the USDA to receive approximately $20.7 million for a conservation easement covering approximately 11,600 acres. Closing was expected in FY2013, with an anticipated capital gain of approximately $19.5 million and use of a capital-loss carryforward.
The fiscal 2013 citrus crop was covered by minimum-price contracts with a floor of approximately $1.60 per pound solids. Sugarcane was sold entirely to United States Sugar Corporation under an agreement containing minimum pricing and extending beyond March 2013 unless terminated.
USSC accounted for approximately 11% of FY2012 revenue and purchased 100% of Alico’s sugarcane, creating significant customer-concentration risk.
Other major customers included Louis Dreyfus at 23% of revenue and Florida Orange Marketers at 18%.
Principal risks include weather events, hurricanes, drought, water availability, citrus greening and citrus canker, commodity prices, input costs, labor availability, environmental liabilities, competition, and changes to Florida agricultural tax classifications.
More than 80% of agricultural lands are concentrated in or near Hendry County, increasing exposure to localized weather and operating disruptions.
Alico’s 51% stockholder, Atlantic Blue Group, can elect all directors and controls the company; the limited public float may increase stock-price volatility and reduce minority-stockholder influence.
The IRS settlement for 2005–2007 tax years was finalized. Federal taxes and interest paid totaled $838,000, federal penalties were waived, approximately $323,000 of state tax and interest was paid after year-end, and $149,000 of additional state interest and penalties remained accrued.
The shareholder derivative lawsuit was settled and approved by the court; Alico continued seeking recovery of defense costs.
On October 3, 2012, Alico completed the remaining Lee County property sale and received approximately $2.4 million net cash. On October 10, 2012, it paid off the Farm Credit mortgage, including a $66,000 prepayment penalty.
Management and the auditors reported effective internal control over financial reporting, and the audit opinion was unqualified.

Important Facts for Investors to Verify

Confirm the exact reporting period: the filing is the FY2012 Form 10-K, not a FY2011 fourth-quarter filing.
Assess the sustainability of FY2012 earnings excluding the $9.1 million real-estate gain, the $1.9 million impairment, and other unusual tax and investment items.
Review citrus disease exposure, crop yields, contract floor prices, and the effect of commodity-price changes on future margins.
Monitor the USSC sugarcane purchase agreement and the company’s dependence on a single sugarcane customer.
Verify completion and cash proceeds from the $20.7 million conservation-easement transaction and the related tax treatment.
Review debt covenants, variable-rate exposure, scheduled principal payments, and the company’s ability to fund approximately $15 million of expected FY2013 capital expenditures.
Evaluate related-party transactions and governance implications arising from Atlantic Blue Group’s 51% ownership and affiliated directors.
Reconcile cash balances, including the difference between unrestricted cash and the $2.5 million restricted land-sale deposit.