Alico, Inc. Form 10-Q Summary
Reporting period: Three and six months ended March 31, 2017. The request identifies “2016 Q2,” but the filing is for fiscal 2017 second quarter. Financial statements are unaudited and presented under U.S. GAAP.
Business Context
Alico is a Florida agribusiness and land-management company with approximately 122,000 acres, including approximately 90,000 acres of mineral rights. Operations comprise Alico Citrus, Conservation and Environmental Resources, and Other Operations. Results are seasonal, with the second and third fiscal quarters generally producing most annual revenue.
Financial Performance
| Metric | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | Six Months Ended March 31, 2017 | Six Months Ended March 31, 2016 |
|---|---|---|---|---|
| Operating revenue | $56.2 million | $71.9 million | $73.6 million | $92.5 million |
| Gross profit | $14.5 million | $19.5 million | $17.3 million | $20.9 million |
| Income from operations | $11.1 million | $16.7 million | $10.1 million | $14.1 million |
| Net income attributable to Alico stockholders | $5.8 million | $8.7 million | $4.1 million | $5.7 million |
| Diluted EPS | $0.70 | $1.05 | $0.49 | $0.69 |
Margins: Gross margin was approximately 25.8% for the quarter and 23.5% year to date, compared with 27.2% and 22.6%, respectively, in the prior-year periods. Operating margin was approximately 19.8% for the quarter and 13.7% year to date, compared with 23.2% and 15.3%. Net margin attributable to Alico stockholders was approximately 10.4% for the quarter and 5.6% year to date.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $(2.7) million, compared with $12.1 million provided in the prior-year period, primarily reflecting unfavorable working-capital changes.
- Investing cash flow was $(2.2) million, including $5.0 million of capital expenditures and $2.7 million of proceeds from asset disposals.
- Financing cash flow was $(0.6) million. The company borrowed $53.5 million and repaid $47.1 million on revolving credit facilities, paid $5.4 million of term-loan principal, repurchased $0.6 million of stock, and paid $1.0 million of dividends.
- Cash and cash equivalents declined to $1.0 million from $6.6 million at September 30, 2016.
- Total principal amount of term loans and lines of credit was $203.3 million at March 31, 2017, versus $202.2 million at September 30, 2016. Long-term debt, net of deferred financing costs, was $185.5 million, and lines of credit totaled $11.4 million.
- Available borrowing capacity was approximately $48.3 million under the $70 million working-capital line and $25 million under the revolving line. Approximately $10.3 million of letters of credit reduced working-capital-line availability.
- Management stated that cash, operating cash flow and available borrowing capacity should satisfy debt service, working-capital needs and capital expenditures for at least the next twelve months. The company was in compliance with its financial covenants at March 31, 2017.
Material Changes Versus Prior Comparable Period
- Revenue declined 21.8% for the quarter and 20.4% year to date, primarily because of lower citrus volumes, reduced third-party fruit purchases and discontinued third-party harvesting and hauling activities.
- Alico Citrus revenue declined 21.6% for the quarter and 19.6% year to date. Total boxes harvested declined 26.3% and 25.6%, respectively, while higher prices per pound solid partially offset lower volume.
- Valencia revenue declined 39.5% because of lower production and later harvest timing. Early and Mid-Season revenue increased because improved pricing and pound solids per box more than offset lower box production.
- Gross profit declined 25.6% for the quarter and 17.3% year to date. General and administrative expense increased 19.3% for the quarter and 6.1% year to date, primarily from new executive employment and stock-compensation costs.
- Net income attributable to Alico stockholders declined 33.2% for the quarter and 28.4% year to date.
- Other expense improved by $0.9 million for the quarter and $1.5 million year to date, including a $1.4 million gain on the February 2017 sale of 49 acres and facilities in Hendry County, Florida, and lower interest expense.
- The company reclassified its Fort Myers office building, listed for approximately $6.0 million, to assets held for sale. No impairment was recorded.
- Cash flow from operations shifted from $12.1 million provided to $2.7 million used year to date, despite lower capital expenditures and proceeds from asset sales.
Guidance, Outlook, Risks and Unusual Items
- Management expects the 2017 citrus crop to be approximately 85% of 2016 production, or approximately 7.8 million boxes. The USDA projected an 18% decline in Florida’s statewide orange crop.
- Management expects fiscal 2017 cost of sales to decrease approximately $1.2 million, but production cost per pound solid increased 16.1% year to date to $1.44 because lower volumes are supporting a largely fixed cost base.
- Key operating risks include weather, citrus greening and citrus canker, pests, water availability, labor costs, commodity prices, interest rates, seasonality, agricultural land values, financing availability and compliance with debt covenants.
- The company has an eleven-year water-retention services contract with the South Florida Water Management District, including potential reimbursement of up to $4.0 million for implementation and annual operating payments of up to $12.0 million, subject to permitting, compliance and annual state funding approval. The filing states that annual payments are not assured.
- Clayton G. Wilson stepped down as CEO effective December 31, 2016, and resigned from the board effective February 27, 2017. Remy W. Trafelet became CEO; Henry R. Slack and George R. Brokaw became Executive Chairman and Executive Vice Chairman.
- The company authorized up to $5.0 million of share repurchases through March 9, 2019 and repurchased 24,502 shares for $641,000 during the six-month period.
- The company entered into new executive employment agreements, including cash compensation, severance provisions and 750,000 performance-based stock options. It also recorded $187,500 of consulting expense for the former CEO during the period.
- No material adverse legal proceedings were reported, and management stated that there were no material changes to previously disclosed risk factors or market-risk disclosures.
Investor Verification Checklist
- Verify the filing period and compare fiscal 2017 results with the correct fiscal 2016 comparable period.
- Assess whether higher citrus prices can offset lower crop volumes, citrus disease effects and rising per-pound production costs.
- Review operating cash-flow weakness, the company’s $1.0 million cash balance and reliance on revolving credit facilities.
- Confirm borrowing availability after considering the $10.3 million of outstanding letters of credit and applicable debt covenants.
- Evaluate the sustainability of earnings excluding the $1.4 million real-estate gain and other nonrecurring items.
- Monitor the Fort Myers office-building sale, water-retention contract approvals and permitting, and the company’s projected 7.8 million-box citrus crop.