ALCO

ALICO, INC. - Form 10-Q Summary (Quarter Ended March 31, 2008)

Business Context and Reporting Period

ALICO, INC. is a Florida-based agricultural and real estate company. This filing covers the quarterly period ended March 31, 2008, and the six-month period ended March 31, 2008. The Company recently changed its fiscal year-end from August 31 to September 30, effective with the 2008 fiscal year. Operations are primarily focused on citrus groves, sugarcane, cattle, and real estate development in Florida.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenue decreased 12.7% for the quarter and 12.2% for the six-month period compared to the prior year. This was driven primarily by lower agricultural revenues due to a 28% decline in citrus prices and reduced sugarcane harvest acreage.
• Profitability Compression: Net income dropped significantly, from $5.5 million to $1.5 million for the quarter, and from $8.1 million to $4.3 million for the six-month period. Income from operations fell from $9.3 million to $2.0 million for the quarter.
• Segment Performance:
  • Citrus: Revenues and gross profits declined due to lower market prices despite expected higher harvest volumes.
  • Cattle: Recorded a loss of $0.6 million for the quarter due to rising feed/fuel costs and a $1.0 million inventory write-down.
  • Vegetables: Recorded a loss due to higher-than-forecast costs in a new joint venture (Alico/J&J Farms).
  • Real Estate: Operating revenue was $0 for the quarter, compared to $803,000 in the prior year quarter, though the six-month period included $3.9 million in revenue from contract extensions.
• Interest Income: Interest and investment income increased to $6.3 million for the six months ended March 31, 2008, compared to $3.5 million in the prior year, largely due to a restructuring of a real estate mortgage note and patronage refunds from the lender.

Outlook, Risks, and Contingencies

• IRS Audit Contingency: The Company is in ongoing negotiations with the IRS regarding audits for tax years 2000-2004 concerning the tax-exempt status of its Agri Insurance subsidiary. The Company paid $66.2 million to the IRS to stop interest accrual and estimates an additional $10.3 million in state taxes and interest will be due upon resolution. A closing document has been executed and submitted for review.
• Management Outlook: Management expects operations to remain profitable in fiscal year 2008 but at levels significantly below fiscal year 2007 due to lower citrus prices. The Company plans to terminate its involvement in the loss-making vegetable joint venture at the conclusion of the current season.
• Real Estate Market: Permitting complications and a market slowdown have led to contract restructurings. The Company is considering options regarding the Plant World property due to recurring losses.
• Dividends: The Board declared a quarterly dividend of $0.275 per share, payable in August 2008.

Investor Verification Checklist

• IRS Settlement Status: Verify the final terms of the IRS settlement regarding the Agri Insurance subsidiary and the total final liability, including the estimated $10.3 million in state taxes.
• Citrus Price Trends: Monitor the trajectory of citrus fruit prices to assess the accuracy of the 28% decline projection and its impact on full-year margins.
• Joint Venture Exit: Confirm the timeline and financial impact of terminating the Alico/J&J Farms vegetable joint venture.
• Debt Covenants: Review the Company's compliance with the restrictive covenants of its $175 million revolving credit facility, particularly given the reduction in operating income.
• Inventory Valuation: Assess the adequacy of inventory write-downs for cattle and sod in light of continued market volatility.