ALCO

ALICO, INC. 10-Q Summary: Quarter Ended December 31, 2008

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended December 31, 2008, for ALICO, Inc., a Florida-based agricultural and real estate company. The registrant operates primarily in citrus, sugarcane, cattle, and vegetable production, alongside real estate development and leasing. The company is an accelerated filer with 7,357,106 shares of common stock outstanding as of February 2, 2009.

Key Financial Metrics

Cash Flow: Operating activities used $6.0 million in cash, compared to providing $3.3 million in the prior year. Investing activities provided $20.7 million, driven by proceeds from the sale of marketable securities ($21.5 million). Financing activities provided $9.1 million, primarily from new notes payable ($16.7 million) offset by principal payments and dividends.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenue decreased 10.4% year-over-year, primarily due to a significant drop in real estate operating revenue ($1.2 million vs. $3.9 million).
• Profitability Shift: The company reported a net loss of $0.2 million compared to a net income of $2.2 million in the prior year. This was driven by lower gross profits from real estate and agricultural operations.
• Real Estate Restructuring: The "East" contract with Ginn Companies was restructured. Alico recognized $1.5 million in non-operating profit from installment payments and $1.2 million in operating revenue from the expiration of an option on the "West" contract.
• Inventory Impairments: Significant charges were taken against inventory: $0.9 million for citrus contracts (purchase obligations exceeded sales prices), $0.5 million for sod (ceasing caretaking activities), and $0.3 million for cattle (market price declines).
• Investment Portfolio: Marketable securities available for sale dropped from $24.3 million to $1.7 million as the company liquidated assets to fund debt reduction and operations. Unrealized losses of $0.4 million were recorded in other comprehensive income.

Outlook, Risks, and Management Commentary

• Weather Risk: A severe cold front in late January/early February 2009 caused temperatures to drop into the mid-20s, resulting in substantial damage to mature vegetable crops and minor damage to citrus and sugarcane. The full financial impact remains undetermined.
• Market Outlook: Management expects lower gross profits for fiscal year 2009 due to declining citrus prices (increased production and carryover inventories) and higher input costs (fertilizer, fuel) capitalized in prior periods.
• Liquidity & Debt: On January 6, 2009, the company used cash to pay down $50 million of its Revolving Line of Credit. The company maintains a $125 million credit facility with $29.9 million available at quarter-end. Management expects to remain in compliance with debt covenants.
• Legal Proceedings: A shareholder derivative action was filed in October 2008 alleging breaches of fiduciary duty by directors regarding a 2004 merger proposal. The suit seeks damages in excess of $1 million.
• Management Changes: Dan L. Gunter resigned as CEO in November 2008; Steven M. Smith was appointed Principal Executive Officer.

Investor Verification Checklist

• Crop Damage Assessment: Verify the final financial impact of the January/February 2009 freeze on vegetable, citrus, and sugarcane yields.
• Real Estate Liquidity: Monitor the timing and valuation of future real estate sales, given the depressed Florida market conditions.
• Citrus Contract Exposure: Review the status of forward purchase contracts where obligations currently exceed sales prices.
• Debt Covenants: Confirm continued compliance with the 60% debt ratio and 2:1 current ratio covenants following the $50 million debt paydown.
• Legal Resolution: Track the status of the shareholder derivative lawsuit filed by Baxter Troutman.