Alico, Inc. Form 10-Q Summary
Business context and reporting period
This filing is Alico, Inc.’s unaudited Form 10-Q for the three and nine months ended June 30, 2018, Alico’s fiscal third quarter. The request metadata identifies “2017 Q3,” but the filing itself clearly reports fiscal 2018 results and compares them with the periods ended June 30, 2017.
Alico is a Florida agribusiness and land-management company owning approximately 117,000 acres, including approximately 90,000 acres of mineral rights. Its segments are Alico Citrus, Conservation and Environmental Resources, and Other Operations.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $26.5 million, down 48.5% | $79.7 million, down 36.4% |
| Gross profit | $11.9 million, down 20.6% | $20.3 million, down 37.0% |
| Income from operations | $9.0 million, down 20.7% | $10.4 million, down 51.3% |
| Net income attributable to Alico common stockholders | $9.1 million, up 66.1% | $12.3 million, up 28.8% |
| Diluted earnings per share | $1.09 | $1.48 |
Gross margin was approximately 44.9% for the quarter and 25.5% year to date, compared with approximately 29.1% and 25.8%, respectively, in the prior-year periods. Operating margin was approximately 33.8% for the quarter and 13.1% year to date, compared with approximately 21.9% and 17.1%. The quarter’s earnings benefited materially from a $7.2 million gain on asset sales, primarily the $6.7 million gain on the Gal Hog property sale.
- Cash and cash equivalents were $26.6 million at June 30, 2018, compared with $3.4 million at September 30, 2017.
- Working capital was $62.4 million, compared with $50.5 million at fiscal year-end; the current ratio improved to 5.02 from 4.16.
- Net cash provided by operating activities was $16.1 million, down from $28.9 million in the prior-year nine-month period.
- Investing activities provided $19.2 million, primarily from $31.7 million of asset-sale proceeds, offset by $12.1 million of capital expenditures.
- Financing activities used $12.1 million, including $9.4 million of term-loan principal payments, $2.2 million of share repurchases, and $1.5 million of dividends.
- Principal debt outstanding was $177.1 million at June 30, 2018, down from $186.5 million at September 30, 2017. No amounts were outstanding under the revolving credit lines.
- Available borrowing capacity was approximately $25.0 million under the revolving line of credit and $59.7 million under the working-capital line, subject to approximately $10.3 million of outstanding letters of credit reducing WCLC availability.
Material changes versus the prior comparable period
- Revenue and citrus production declined sharply because Hurricane Irma caused fruit drop and reduced the 2017-2018 harvest. Nine-month citrus revenue fell 36.8%, while total boxes harvested fell 36.4%.
- Management reported that completed fiscal 2018 box production was down approximately 36%, better than its initial estimate of a 40% to 45% decline.
- Lower production reduced revenue and operating income, although lower harvesting and inventory-related costs, Hurricane Irma insurance proceeds, and reduced general and administrative expenses partially mitigated the impact.
- The Company received approximately $4.2 million of Hurricane Irma-related insurance proceeds through June 30, 2018, and approximately $9.4 million through August 3, 2018, including approximately $8.9 million for crop claims. Additional claims remained outstanding.
- Net income increased despite weaker operating results because of asset-sale gains and a lower effective tax burden, including an approximately $10.0 million non-cash deferred-tax benefit from the Tax Cuts and Jobs Act, partly offset by a $6.1 million valuation allowance on a capital-loss carryforward.
- Alico sold several non-core assets, including its office building, Gainesville nursery, breeding herd, Chancey Bay property, and Gal Hog property. It also classified additional properties with an aggregate carrying value of approximately $9.7 million as held for sale and recorded a $1.9 million impairment.
- The Company repurchased 72,266 shares for approximately $2.2 million during the nine-month period and terminated repurchase activity on June 29, 2018, while approximately $1.7 million remained authorized for potential future repurchases.
Guidance, outlook, risks, contingencies, and unusual items
- Under the Alico 2.0 modernization program, management expects to reduce expenses per acre from $3,314 in fiscal 2016 to $2,164 when fully implemented over two years, and cost per pound solid from $2.14 to $1.56. The filing cautions that these savings are not assured.
- Management expects cash on hand, operating cash flow, asset-sale proceeds, and available credit facilities to fund debt service, working capital, and capital expenditures for at least the next twelve months and over the long term.
- The business is seasonal, with the second and third fiscal quarters typically generating most annual revenue. Current-year harvesting and working-capital patterns were affected by Hurricane Irma.
- Key risks include weather, citrus greening and other agricultural diseases, water availability and allocations, citrus pricing, interest rates, financing availability, debt covenants, agricultural land values, labor disruptions, government land-use restrictions, and execution of Alico 2.0.
- The Company was in compliance with its financial covenants at June 30, 2018. It had approximately $2.7 million of citrus-tree purchase commitments and $10.3 million of outstanding standby letters of credit.
- The South Florida Water Management District environmental-services contract provides for annual payments of up to $12.0 million for operations and maintenance, subject to annual approval and funding; the filing states that future payments are not guaranteed.
- No material adverse legal proceedings, material changes in previously disclosed risk factors, or control deficiencies were reported.
Important facts for investors to verify
- Separate recurring operating performance from the $7.2 million quarterly gain on asset sales and other unusual items.
- Confirm the final amount and timing of remaining Hurricane Irma insurance and potential federal or state relief proceeds.
- Assess whether citrus production, citrus greening impacts, and pricing support recovery after the approximately 36% production decline.
- Evaluate the sustainability of projected Alico 2.0 cost reductions and the effect of asset divestitures on future revenue and cash flow.
- Review debt maturities, variable-rate exposure, covenant requirements, and the November 2019 maturities of the revolving facilities.
- Consider the effect of seasonality and the approximately $2.7 million of committed citrus-tree purchases on future liquidity.