Alico, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the three and nine months ended June 30, 2011, filed August 9, 2011. The request metadata identifies “2010 Q3,” but the filing text clearly reports fiscal 2011 third-quarter results. Alico is a Florida land-management and agribusiness company operating primarily in citrus, sugarcane, cattle, land leasing, mining royalties and related activities.
Financial Performance and Position
| Metric | Three months ended June 30 | Change | Nine months ended June 30 | Change |
|---|---|---|---|---|
| Operating revenue | $39.3 million | Up 38.3% | $92.4 million | Up 24.5% |
| Gross profit | $11.8 million | Up 119.9% | $22.4 million | Up 127.3% |
| Income from operations | $10.1 million | Up 166.6% | $17.0 million | Up 238.7% |
| Net income | $6.0 million | Up 161.0% | $8.6 million | Up 278.8% |
| Basic and diluted EPS | $0.81 | Up from $0.31 | $1.17 | Up from $0.31 |
Operating margins improved materially: gross margin was approximately 30.1% for the quarter and 24.2% for the nine-month period, compared with approximately 18.9% and 13.3%, respectively, in the prior-year periods. Operating margin was approximately 25.6% for the quarter and 18.4% for the nine months.
- Agricultural revenue increased to $38.7 million for the quarter and $90.3 million for the nine months, primarily from favorable citrus and sugarcane pricing, higher citrus yields and expanded sugarcane acreage.
- Citrus Groves generated $22.0 million of quarterly revenue and $10.6 million of quarterly gross profit, compared with $15.1 million and $5.0 million, respectively, in the prior year.
- Sugarcane revenue increased 95.7% for the nine-month period, while gross profit improved to $0.8 million from a $22 thousand loss.
- Vegetable operations were discontinued in June 2010 after recurring losses; the elimination of those operations also benefited year-over-year gross profit.
- Interest expense declined 40.7% for the nine months to $1.6 million, primarily because of lower borrowing rates following the September 2010 refinancing and lower debt.
- A $1.7 million write-off of Farm Credit allocated surplus was recorded in interest and investment income during the second quarter of fiscal 2011. Nine-month interest and investment income was a $1.7 million loss, compared with $1.2 million of income in the prior year.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $7.2 million for the nine months, down from $12.8 million in the prior year, principally because of working-capital changes, including higher accounts receivable. The prior-year period included a $4.8 million income-tax refund.
- Investing activities used $5.6 million, including $8.7 million of capital expenditures. Capital spending included $2.6 million for a new office building and related improvements, $3.0 million for sugarcane expansion and $1.3 million for citrus plantings.
- Financing activities used $9.4 million, including $7.6 million of net debt repayments, $1.0 million of treasury-stock purchases and $0.7 million of dividends.
- Cash and cash equivalents were $3.1 million at June 30, 2011, compared with $10.9 million at September 30, 2010. Cash and liquid investments totaled $4.1 million.
- Working capital was $29.0 million, compared with $29.5 million at September 30, 2010; the current ratio declined to 3.87:1 from 4.73:1.
- Total debt was $65.8 million, down from $73.5 million. This included $22.4 million drawn on a revolving credit facility, $40.0 million under a term note and $3.5 million under a mortgage note. Approximately $37.7 million remained available under the revolving facility.
- The company stated that it was in compliance with all debt covenants and believed current cash, available credit and expected operating cash flow would satisfy foreseeable working-capital and capital-expenditure needs.
Material Changes, Outlook and Risks
- Results benefited substantially from citrus pricing, higher citrus production and sugarcane expansion. Management noted that agricultural results are seasonal and highly sensitive to weather, disease, crop yields and volatile commodity prices.
- Management expected to sell most cattle calves during the fourth fiscal quarter and anticipated benefiting from higher cattle prices, while continuing cost-reduction initiatives.
- Bowen had $15.7 million of remaining citrus-purchase commitments for fiscal 2011 through 2013. Except for approximately $0.3 million, the commitments were covered by sales agreements at prices above cost.
- The IRS issued Revenue Agent Reports concerning tax years 2005 through 2007. As of the July 6, 2011 report, the IRS asserted $31.1 million of taxes and penalties, consisting of $14.5 million in taxes and $16.6 million in penalties, excluding unquantified interest. The company disputed the positions and planned to appeal; an IRS Appeals Conference was scheduled for August 17–18, 2011. A substantial payment could materially impair liquidity.
- The IRS dispute principally concerns Agri-Insurance’s U.S.-taxpayer election and Alico-Agri’s use of the installment method for real-estate sales. The company stated that it would record penalties and interest when any settlement is reached.
- A shareholder derivative action remained pending after a court denied Alico’s motion to dismiss in May 2011. The complaint seeks damages exceeding $1.0 million; management stated that routine legal matters were not expected to materially affect financial position or results.
- Atlantic Blue Group owned approximately 51% of Alico and controlled the company. The filing disclosed related-party arrangements, including payments to entities and individuals affiliated with company directors and sales, purchases and marketing activity involving related parties.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
Investor Verification Checklist
- Reconcile the requested “2010 Q3” designation with the filing’s actual June 30, 2011 reporting period.
- Assess the sustainability of earnings growth given reliance on favorable citrus and sugarcane prices, crop yields and seasonal agricultural conditions.
- Monitor the IRS examination, potential interest and penalties, appeal results and possible liquidity impact of the $31.1 million claim.
- Verify cash availability, revolving-credit capacity, debt maturities and compliance with covenants.
- Review capital-spending plans and the expected cash conversion of citrus inventory and accounts receivable.
- Evaluate related-party transactions and the pending shareholder derivative litigation.
- Confirm the status and recoverability of the Magnolia Fund investment and the discontinued Farm Credit allocated-surplus asset.