Alico, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2014, compared with the same periods ended June 30, 2013. The request metadata identifies “2013 Q3,” but the filing itself is the fiscal 2014 third-quarter Form 10-Q, signed August 11, 2014.
Business context
Alico is a Florida agribusiness and land-management company owning approximately 130,720 acres across six counties. Its principal segments are Citrus Groves, Agricultural Supply Chain Management, Improved Farmland, Ranch and Conservation, and Other Operations. Agricultural results are seasonal and exposed to weather, disease, pests, crop prices, water availability, labor, land values, and interest rates.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Nine months ended June 30, 2014 | Nine months ended June 30, 2013 |
|---|---|---|---|---|
| Total revenue | $28.675 million | $35.229 million | $81.139 million | $94.995 million |
| Gross profit | $4.259 million | $9.065 million | $16.955 million | $19.865 million |
| Income from operations | $2.162 million | $6.812 million | $8.545 million | $13.340 million |
| Net income | $1.119 million | $4.079 million | $4.485 million | $7.890 million |
| Diluted EPS | $0.15 | $0.55 | $0.61 | $1.07 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $15.412 million | $14.753 million |
- Three-month revenue declined 18.6%, while nine-month revenue declined 14.6%.
- Approximate three-month gross margin was 14.9%, versus 25.7% in the prior year; operating margin was 7.5%, versus 19.3%; net margin was 3.9%, versus 11.6%.
- Approximate nine-month gross margin was 20.9% in both periods; operating margin declined to 10.5% from 14.0%, and net margin declined to 5.5% from 8.3%.
- Cash and cash equivalents were $24.192 million at June 30, 2014, compared with $24.583 million at September 30, 2013. Working capital increased to $57.064 million from $48.304 million.
- Total debt was $34.500 million, including $2.000 million due within one year. The company had no borrowings under its $60.000 million revolving line of credit, which was fully available at quarter-end.
- Total assets were $200.998 million and stockholders’ equity was $142.109 million at June 30, 2014.
- Nine-month capital expenditures were $11.225 million, down from $16.792 million. Financing uses included $4.844 million for treasury-stock purchases, $2.339 million of dividends, and $1.500 million of debt principal payments.
Material changes versus the prior comparable period
- Citrus: Revenue increased 14.4% for the quarter and 7.7% for the nine-month period, while gross profit increased 30.1% and 40.1%, respectively. Harvested boxes and pounds solids declined, but higher citrus prices more than offset lower production. Citrus Greening, weather, premature fruit drop, and smaller fruit adversely affected output.
- Agricultural Supply Chain Management: Revenue declined 61.3% for the quarter and 55.5% for the nine months, primarily because of lower Florida production and management’s decision to reduce externally handled fruit volumes. Gross profit declined 63.5% and 71.0%, respectively.
- Improved Farmland: Revenue declined 54.6% for the quarter and 10.3% for the nine months. The segment recorded a gross loss of $4.431 million in the quarter and $1.544 million for the nine months, including an approximately $2.3 million one-time charge related to the sugarcane lease and reimbursement of planting, caretaking, and equipment costs.
- Corporate expenses: Nine-month general and administrative expense increased 28.9% to $8.410 million, primarily due to approximately $2.3 million of change-in-control-related costs, including accelerated equity vesting, directors’ and officers’ insurance, and former-CEO consulting and non-competition costs.
- Change in control: On November 19, 2013, 734 Agriculture and affiliates acquired approximately 51% of Alico’s voting securities. The transaction resulted in a new board and the appointment of Clayton G. Wilson as CEO.
- Share activity: The company purchased 118,792 treasury shares during the nine months, while 171,114 shares were issued to directors and named executive officers. The company reduced dividends to $0.06 per share in the third and fourth quarters to retain cash.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects the sugarcane lease to reduce production and operational risk, eliminate related planting and equipment capital expenditures, lower depreciation, and improve free cash flow. The 10-year lease provides annual base rent of approximately $3.548 million plus potential price-linked rent.
- The company received approximately $14.6 million from United States Sugar Corporation on July 1, 2014, including base rent and reimbursement or sale proceeds related to sugarcane assets and costs.
- On August 7, 2014, Alico agreed to sell approximately 30,959 gross acres in Hendry County for a base price of $91.436 million, subject to acreage-based adjustments and closing conditions. Closing was expected in November 2014. A substantial portion is expected to be leased back to Alico for 10 years at annual rent approximating 5% of the purchase price. Completion and any Section 1031 tax-deferred exchange are not assured.
- A 2,800-acre Polk County parcel sold July 1, 2014 for $5.623 million; $5.267 million of cash was held by a qualified intermediary while potential like-kind exchange transactions were evaluated.
- The credit agreement was amended July 1, 2014. The term-loan spread decreased to LIBOR plus 225 basis points, and the revolving-line spread range decreased to LIBOR plus 195 to 225 basis points. The company remained in covenant compliance at June 30, 2014.
- Remaining citrus purchase commitments were approximately $16.714 million at June 30, 2014, covered by sales agreements. Management expected committed volumes to be sold at cost or higher.
- Management states that routine legal matters are not expected to have a material adverse effect. No material changes were reported to the Form 10-K risk factors or market-risk disclosures.
- The company’s liquidity assessment depends on cash on hand, operating cash flow, the available revolving facility, and successful execution of planned land transactions. Agricultural seasonality and crop conditions can cause substantial period-to-period volatility.
Important facts for investors to verify
- Confirm the filing period and fiscal-year labeling, because the request metadata references 2013 Q3 while the filing reports June 30, 2014.
- Review the effect of the sugarcane lease and the approximately $2.3 million one-time charge on future revenue, margins, capital spending, depreciation, and cash flow.
- Verify closing of the $91.436 million Hendry County land sale, the related leaseback terms, acreage-based price adjustments, and any Section 1031 tax treatment.
- Monitor citrus production, Citrus Greening and other pests, Florida crop forecasts, pricing per pound solid, and the sustainability of improved citrus margins.
- Assess customer and market concentration, including the company’s sole sugarcane customer and exposure to agricultural commodity prices.
- Evaluate floating-rate debt exposure, future LIBOR spread resets, covenant compliance, and the $24.5 million debt maturity beyond five years.
- Consider change-in-control-related costs, related-party arrangements with Silver Nip and controlling shareholders, and the potential effect of concentrated ownership on governance.