Alico, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2017. The requested metadata identifies “2016 Q3,” but the filing is for fiscal 2017 third quarter. Alico is a Florida agribusiness and land-management company with approximately 122,000 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 | $51.5 million, up 10.0% | $125.2 million, down 10.2% |
| Gross profit | $15.0 million, up 9.7% | $32.3 million, down 6.6% |
| Income from operations | $11.3 million, up 3.3% | $21.4 million, down 14.6% |
| Net income attributable to Alico common stockholders | $5.5 million, up 17.0% | $9.6 million, down 7.9% |
| Diluted earnings per share | $0.66, versus $0.56 | $1.15, versus $1.25 |
- Approximate gross margin was 29.1% for the quarter and 25.8% year to date, compared with 29.2% and 24.8%, respectively, in the prior-year periods.
- Approximate operating margin was 21.9% for the quarter and 17.1% year to date, compared with 23.3% and 18.0%, respectively. Quarterly margin benefited from higher revenue and lower interest expense but was pressured by increased general and administrative costs.
- Cash provided by operating activities was $28.9 million, down from $34.2 million. Investing cash use was $8.3 million, including $11.5 million of capital expenditures, while financing cash use was $17.3 million.
- Cash and cash equivalents were $9.9 million at June 30, 2017, up from $6.6 million at September 30, 2016. Working capital was $54.1 million, and the current ratio was 5.14 to 1.
- Total debt principal was $189.2 million, down from $202.2 million. No revolving or working-capital line borrowings were outstanding at June 30, although approximately $10.3 million of letters of credit reduced availability.
- Available borrowing capacity was approximately $25.0 million under the revolving line and $59.7 million under the working-capital line. The company reported compliance with all financial covenants.
- Common dividends declared were $0.06 per share for the quarter and $0.18 per share year to date.
Material changes versus the prior comparable periods
- Quarterly revenue increased primarily because of the timing of fruit sales, higher pound solids per box, and higher citrus prices. Year-to-date revenue declined because of lower production volumes.
- Alico Citrus revenue increased 9.5% for the quarter but declined 9.8% year to date. Total boxes harvested declined 1.1% for the quarter and 17.8% year to date, while year-to-date price per pound solids increased 13.3%.
- The Florida orange crop was approximately 68.7 million boxes for the 2016–17 season, down 15.9% from the prior season. Alico attributed production pressure to weather, horticultural conditions, citrus greening, premature fruit drop, and smaller fruit.
- Conservation and Environmental Resources produced a gross loss of $0.9 million year to date, modestly improved from a $1.0 million loss. Other Operations gross profit increased to $0.7 million year to date.
- General and administrative expense increased 35.0% for the quarter and 14.4% year to date, primarily due to new executive employment agreements, stock compensation, and severance costs.
- Interest expense declined by $0.2 million for the quarter and $0.5 million year to date as debt outstanding decreased. Year-to-date results also included an approximately $1.4 million gain from the sale of 49 acres and facilities in Hendry County, Florida.
- The company began phasing out its Gainesville citrus nursery and consolidating operations in Arcadia. It recorded approximately $1.2 million of transition and inventory-spoilage expenses and reduced inventory by approximately $0.8 million.
- Management changes included the appointment of Remy Trafelet as CEO and the appointments of Henry Slack as Executive Chairman and George Brokaw as Executive Vice Chairman, effective December 31, 2016. New employment agreements included salaries, severance provisions, and 750,000 stock options with market-based vesting hurdles.
Outlook, risks, contingencies, and unusual items
- Management believes cash on hand, operating cash flow, and available credit will satisfy debt service, working capital, and capital expenditure needs for at least the next twelve months.
- No formal earnings or revenue guidance was provided. Results are highly seasonal, with the second and third fiscal quarters generally producing most annual revenue and the first and fourth quarters generally requiring more working capital.
- Principal risks include weather, citrus greening and other diseases, pests, water availability and allocations, citrus pricing and production volumes, energy and labor costs, interest rates, financing availability, land values, regulatory restrictions, seasonality, and the ability to comply with debt covenants.
- Alico has an eleven-year water-retention services contract with the South Florida Water Management District. The contract allows up to $4.0 million of implementation reimbursement and provides for potential annual payments of up to $12.0 million, subject to project compliance and annual funding approval. No related revenue had been recognized.
- The company listed its Fort Myers office building for sale at approximately $6.0 million and classified its $3.2 million carrying value as held for sale. On August 1, 2017, it signed an agreement to sell the building for $5.55 million, subject to buyer due diligence and termination rights, with a five-year leaseback of part of the space.
- The company authorized up to $7.0 million of share repurchases through March 9, 2019. It repurchased 75,623 shares for approximately $2.2 million during the first nine months of fiscal 2017.
- The filing states that no current legal proceedings are expected to have a material adverse effect and that there were no material changes to previously disclosed risk factors or market-risk disclosures.
Investor verification items
- Verify the effect of citrus greening, weather, crop volumes, and pricing on future production and margins.
- Monitor debt maturities, variable-rate exposure, refinancing needs, covenant compliance, and the approximately $10.3 million of outstanding letters of credit.
- Confirm completion and proceeds of the Fort Myers office sale and the economics of the related leaseback.
- Assess whether the South Florida water-retention project receives required permits, construction completion, and annual funding approvals before recognizing expected payments.
- Evaluate the sustainability of earnings given the seasonal business model, lower year-to-date volumes, increased production cost per pound solid, executive compensation costs, and nursery phase-out expenses.
- Review related-party arrangements, including executive employment and severance terms and the shared-services agreement costing approximately $592,000 annually.