Alico, Inc.: Form 10-Q for the period ended Dec 31, 2023

The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related Notes thereto and other information included elsewhere in this Quarterly Report on Form 10-Q, our 2023 Annual Report on Form 10-K, and in our other filings with the SEC. Our actual results of operations may differ materially from those discussed in forward-looking statements as a result of various factors, including, but not limited to, those included our 2023 Annual Report on Form 10-K and other portions of this Quarterly Report. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. In the following discussion and analysis, dollars are in thousands.

Business Overview

Business Description

Alico, Inc., together with its subsidiaries (collectively, “Alico”, the “Company”, “we”, “us” or “our”) generates operating revenues primarily from the sale of our citrus products, providing management services to citrus groves owned by third parties, and grazing and hunting leasing. We operate as two business segments, and all of our operating revenues are generated in the United States. For the three months ended December 31, 2023, we generated operating revenues of $13,985, loss from operations of $17,527, and net income attributable to common stockholders of $42,945. Net cash used in operating activities was $13,169 for the three months ended December 31, 2023.

Business Segments

Operating segments are defined in the criteria established under the Financial Accounting Standards Board – Accounting Standards Codification (“FASB ASC”) Topic 280 as components of public entities that engage in business activities from which they may earn revenues and incur expenses for which separate financial information is available and which is evaluated regularly by our chief operating decision maker (“CODM”) in deciding how to assess performance and allocate resources. Our CODM assesses performance and allocates resources based on its operating segments.

Our two segments are as follows:

• Alico Citrus includes activities related to planting, owning, cultivating and/or managing citrus groves to produce fruit for sale to fresh and processed citrus markets, including activities related to the purchase and resale of fruit and value-added services, which include contracting for the harvesting, marketing and hauling of citrus; and
• Land Management and Other Operations includes activities related to native plant sales, grazing and hunting leasing, management and/or conservation of unimproved native pastureland and activities related to rock mining royalties and other insignificant lines of business. Also included are activities related to owning and/or leasing improved farmland. Improved farmland is acreage that has been converted, or is permitted to be converted, from native pasture and which may have various improvements including irrigation, drainage and roads.

For the three months ended December 31, 2023 and 2022, the Alico Citrus segment generated 97.2% of our consolidated revenues and the Land Management and Other Operations segment generated 2.8% of our consolidated revenues.

Recent Developments

Florida Forever Program Land Sale

On December 21, 2023, the sale of 17,229 acres of the Alico Ranch to the State of Florida was consummated and we received gross proceeds of $77,631 (the “Sale”).

Debt Retirement

On December 26, 2023. the proceeds from the Sale were used to repay our Working Capital Line of Credit (“WCLC”) and retire $19,094 of Variable Rate Term Debt and will retain the balance of the proceeds for general corporate purposes. See Note 4. “Assets Held for Sale” to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

Grove Management Agreement

On October 30, 2023, we entered into a Citrus Grove Management Agreement (the “Grove Owners Agreement”) with an unaffiliated group of third parties to provide citrus grove caretaking and harvest and haul management services for approximately 3,300 acres owned by such third parties. Under the terms of the Grove Owners Agreement, we are reimbursed by the third parties for all costs incurred related to providing these services and receive a management fee based on acres covered under this agreement. The Grove Owners Agreement may be terminated with written notice provided at least 60 days prior to the commencement of the next fiscal year, occurring subsequent to September 30, 2024, and with shorter notice under certain conditions.

Citrus Research and Field Trial Foundation

In January 2024, we received $1,790 from the Citrus Research and Field Trial Foundation (“CRAFT”) of grower’s support payments in connection with our use of Oxytetracycline (“OTC”), to combat the effect of “greening” in our citrus trees.

Condensed Consolidated Results of Operations

The following discussion provides an analysis of our results of operations for the three months ended December 31, 2023, as compared to 2022:

(in thousands)

NM = Not meaningful

Operating Revenue

The increase in revenue for the three months ended December 31, 2023, as compared to the three months ended December 31, 2022, was primarily due to a 24.9% increase in pound solids, driven by a 30.1% increase in processed box production, as we begin to recover from the effects of Hurricane Ian.

Operating Expenses

The increase in operating expenses for the three months ended December 31, 2023, as compared to the three months ended December 31, 2022, was primarily driven by a $10,846 adjustment to reduce inventory to its net realizable value, as a result of lower than anticipated box production from our Early and Mid-Season crop, due to the impacts of Hurricane Ian; as well as increased harvest and haul costs driven by our increased box production and approximately $1,300 we received under the CRBG program in the quarter ended December 31, 2022, which was the last installment of this grant program for the 2017 storm, Hurricane Irma. See Note 3. “Inventories” to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

General and Administrative Expense

General and administrative expense for the three months ended December 31, 2023 was $3,272, compared to $2,509 for the three months ended December 31, 2022. The increase was primarily due to an increase in salaries and wages of $607 and consulting fees principally related to real estate entitlement activities of $317.

Other Income (expense), net

Other income (expense), net for the three months ended December 31, 2023 and 2022, was $75,515 and $2,041, respectively. The increase to other income (expense), net, is primarily due to the sale of 17,229 acres of the Alico Ranch to the State of Florida.

Income Taxes

The income tax provision (benefit) was $15,552 and $(1,083) for the three months ended December 31, 2023 and 2022, respectively. The income tax provision for the three months ended December 31, 2023 was principally due to the sale of 17,229 acres of the Alico Ranch to the State of Florida, while the income tax provision for the three months ended December 31, 2022 was driven by the pre-tax loss generated for the period.

The following discussion provides an analysis of our operating segments:

Alico Citrus

(in thousands, except per box and per pound solids data)

NM = Not meaningful

Components of Results of Operations for Alico Citrus Segment

We sell our Early and Mid-Season and Valencia oranges to orange juice processors. The processors generally buy the citrus crop on a pound solids basis, which is the measure of the soluble solids (sugars and acids) contained in one box of fruit. Our Fresh Fruit revenue is derived from sales to packing houses that purchase the citrus on a per box basis. We also provide citrus grove caretaking and harvest and haul management services to third parties from which revenues are recorded as Grove Management Services, including a management fee. Other revenues consist of the purchase and reselling of fruit.

Operating expenses for our Alico Citrus segment consist primarily of Cost of Sales, Harvesting and Hauling costs and Grove Management Service costs. Cost of Sales represents the cost of maintaining the citrus groves for the preceding calendar year and does not vary in relation to production. Harvesting and Hauling costs represent the costs of bringing citrus product to processors and vary based upon the number of boxes produced. Grove Management Services costs include those costs associated with citrus grove caretaking and harvest and haul management services provided to third parties. Other expenses include the period costs of third-party grove caretaking and the purchase and reselling of third-party fruit.

Comparison of the Three Months Ended December 31, 2023 and 2022 for the Alico Citrus Segment

The increase in revenue for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, was primarily due to a 24.9% increase in pound solids, driven by a 30.1% increase in processed box production, as we began to recover from the effects of Hurricane Ian. Our fruit production for the three months ended December 31, 2022 was adversely impacted by the fruit drop caused as a result of the impact of Hurricane Ian in September 2022. Although Hurricane Ian initially impacted the fiscal year 2023 harvest, we expect it may take another season, or more, for the groves to recover to pre-hurricane production levels.

In addition, there was an increase in the price per pound solid of 3.4% for the three months ended December 31, 2023, compared to the same period in the prior year, as a result of more favorable pricing in one of our contracts with Tropicana.

For the three months ended December 31, 2023, we also recorded an increase in revenue from sales of Fresh Fruit, primarily due to an increase in pricing per box of 31.2%, partially offset by a decrease in boxes produced of 13.9%, as compared to the three months ended December 31, 2022.

We recorded $691 and $189 of revenue from the Grove Owners relating to Grove Management Services for the three months ended December 31, 2023 and 2022, respectively. The increase in grove management services revenue was principally due to the signing of the new Grove Owners Agreement in October 2023.

The 89.0% increase in Cost of Sales, as compared to the same period in the prior year, was principally due to an adjustment of $10,846 to reduce inventory to its net realizable value as a result of the continued recovery from the impacts of Hurricane Ian, increased harvest and haul costs driven by our increased box production and approximately $1,300 we received under the CRBG program in the quarter ended December 31, 2022, which was the last installment of this grant program for the 2017 storm, See Note 3. “Inventories” to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

For the three months ended December 31, 2023, we also recorded an increase in Harvesting and Hauling expenses per box, which is directly related to a 30.1% increase in boxes harvested and an increase in the cost per box of harvesting labor costs, when compared to the similar period in the prior year.

We recorded $368 and $67 of operating expenses relating to grove management services for the Grove Owners for the three months ended December 31, 2023 and 2022, respectively. The increase in grove management services expenses was principally due to the signing of the new Grove Owners Agreement in October 2023.

The credit amounts shown in “Fresh Fruit and Other” in operating expenses above primarily represent federal relief proceeds of approximately $1,300 received under the CRBG program in the quarter ended December 31, 2022.

Land Management and Other Operations

The table below presents key operating measures for the three months ended December 31, 2023 and 2022 for the Land Management and Other Operations segment:

(in thousands)

Components of Results of Operations for Land Management and Other Operations Segment

Land and Other Leasing includes lease income from leases for grazing rights, hunting leases, a farm lease, a lease to a third party of an aggregate mine, leases of oil extraction rights to third parties, and other miscellaneous income.

Land and Other Leasing operating expenses includes real estate, property taxes, general and administrative expenses including salaries, benefits and legal.

Comparison of the Three Months Ended December 31, 2023 and 2022 for the Land Management and Other Operations Segment

The increase in revenues from Land Management and Other Operations for the three months ended December 31, 2023, as compared to the same period in the prior year, was primarily due to the signing of new farming leases.

The increase in operating expenses from Land Management and Other Operations for the three months ended December 31, 2023, as compared to the three months ended December 31, 2022, was primarily due to an increase in property taxes.

Seasonality

We are primarily engaged in the production of fruit for sale to citrus markets, which is of a seasonal nature, and subject to the influence of natural phenomena and wide price fluctuations. Historically, the second and third quarters of our fiscal year produce most of our annual revenue. Working capital requirements are typically greater in the first and fourth quarters of the fiscal year, coinciding with harvesting cycles. Because of the seasonality of the business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Liquidity and Capital Resources

A comparative balance sheet summary is presented in the following table:

(in thousands)

Sources and Uses of Liquidity and Capital

Our business has historically generated full fiscal year positive net cash flows from operating activities, although the net cash flow in the first quarter of each fiscal year has been negative because of seasonality and the associated need to expend cash in advance of generating revenues from the harvesting season. Sources of cash primarily include cash flows from operations, sales of under-performing land and other assets, amounts available under our credit facilities, and access to capital markets. Access to additional borrowings under revolving lines of credit is subject to the satisfaction of customary borrowing conditions. As a public company, we may have access to other sources of capital. However, access to, and availability of, financing on acceptable terms in the future will be affected by many factors, including (i) financial condition, prospects, and credit rating; (ii) liquidity of the overall capital markets; and (iii) the state of the economy. There can be no assurance that we will continue to have access to the capital markets on acceptable terms, or at all.

The principal uses of cash that affect our liquidity position include the following: operating expenses including employee costs, the cost of maintaining the citrus groves, harvesting and hauling of citrus products, capital expenditures, stock repurchases, dividends, debt service costs including interest and principal payments on term loans and other credit facilities and acquisitions.

Management believes that a combination of cash-on-hand, cash generated from operations, and asset sales and availability under our lines of credit will provide sufficient liquidity to service the principal and interest payments on our indebtedness and will satisfy working capital requirements and capital expenditures for at least the next twelve months and over the long term. However, this is subject, to a certain extent, on general economic, financial, competitive, regulatory and other factors that are beyond our control.

Borrowing Facilities and Long-term Debt

We have a $70,000 working capital line of credit and a $25,000 revolving line of credit, of which $69,752 and $25,000 was available for general use as of December 31, 2023 (see Note 7. “Long-Term Debt and Lines of Credit” to the accompanying Condensed Consolidated Financial Statements). We may utilize the available cash to pay down indebtedness, pursue citrus grove acquisitions, conduct share repurchases, and possibly reinstate increased dividends. If we choose to pursue significant growth and other corporate opportunities, these actions could have a material adverse impact on its cash balances and may require us to finance such activities by drawing down on our lines of credit or by obtaining additional debt or equity financing. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. Any inability to obtain additional financing could adversely impact our ability to pursue different growth and other corporate opportunities.

The level of debt could have important consequences on our business, including, but not limited to, increasing our vulnerability to general adverse economic and industry conditions, limiting the availability of cash flow to fund future investments, capital expenditures, working capital, business activities and other general corporate requirements, and limiting flexibility in planning for, or reacting to, changes in its business and industry.

Our credit facilities are subject to various debt covenants including the following financial covenants: (i) minimum debt service coverage ratio of 1.10 to 1.00; (ii) tangible net worth of at least $160,000 increased annually by 10% of consolidated net income for the preceding years, or $174,628 applicable for the year ended September 30, 2023; (iii) minimum current ratio of 1.50 to 1.00; (iv) debt to total assets ratio not greater than .625 to 1.00; and (v) solely in the case of the WCLC, a limit on capital expenditures of $30,000 per fiscal year. As of December 31, 2023, the Company was in compliance with all of the financial covenants.

Cash Flows

Cash and restricted cash increased from $269 as of December 31, 2022, to $21,262 as of December 31, 2023. The components of these changes are discussed below.

(in thousands)

Net Cash Provided By (Used In) Operating Activities

The $3,504 increase in Net Cash used in operating activities was principally due to increased interest expense associated with borrowings under our WCLC and the timing of interest payments, in connection with the early repayment of debt, and other payments, for the three months ended December 31, 2023, as compared to the same period for the prior year.

Net Cash Provided By (Used In) Investing Activities

The $75,721 increase in Net Cash provided by (used in) investing activities for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, is primarily due to proceeds from the sale of 17,229 acres of the Alico Ranch.

Net Cash (Used In) Provided By Financing Activities

The increase of $54,051 in Net Cash (used in) provided by financing activities for the three months ended December 31, 2023, as compared to the three months ended December 31, 2022, was primarily due to the repayment of the WCLC and the $19,094 Met Life Variable-Rate Term debt with the proceeds from the sale of 17,229 acres of the Alico Ranch, as compared to an increase in net borrowings under WCLC in the same period in the prior year.

We had $0 and $19,045 outstanding on our revolving lines of credit as of December 31, 2023 and December 31, 2022, respectively.

The WCLC line of credit agreement provides for Rabo Agrifinance, Inc. to issue up to $2,000 in letters of credit on our behalf. As of December 31, 2023, there was $248 in outstanding letters of credit, which correspondingly reduced our availability under the WCLC.

Contractual Obligations

Our material cash requirements from known contractual and other obligations are described in the accompanying notes to the financial statements within Item 1 of Part I of this Quarterly Report. These include principal and interest payments on long-term debt as described in Note 7. “Long-Term Debt and Lines of Credit”, operating leases as described in Note 10. “Leases” and purchase commitments as described in Note 12. “Commitments and Contingencies” to the Condensed Consolidated Financial Statements included in this Quarterly Report.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company to make certain estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical experience, available current market information and on various other assumptions that management believes are reasonable under the circumstances. Additionally, the Company evaluates the results of these estimates on an on-going basis. Management’s estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

See Note 1. “Description of Business and Basis of Presentation” to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for a detailed description of recent accounting pronouncements. There have been no material changes to the Company’s Critical Accounting Policies and Estimates from those reflected in the Company’s 2023 Annual Report on Form 10-K.

Interest Rate Risk - We are subject to interest rate risk from the utilization of financial instruments such as term loan debt and other borrowings. Our primary long-term obligations are fixed rate debts subject to fair value risk due to interest rate fluctuations. See Note 1. “Description of Business and Basis of Presentation” to these Condensed Consolidated Financial Statements.

We are also subject to interest rate risk on our variable rate debt; however, at December 31, 2023, we had no variable-rate debt outstanding.

In the three months ended December 31, 2023, there were no other material changes to our quantitative and qualitative disclosures about market risk from those discussed in Part II, Item 7A in our Annual Report on Form 10-K for the year ended September 30, 2023, filed with the SEC on December 6, 2023.

Limitations on effectiveness of controls and procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of December 31, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2023 there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, as filed with the SEC on December 6, 2023.