ALICO, INC. - Annual Report: 2019 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
For the Fiscal Year Ended | September 30, 2019 | ||
or | |||
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||
For the transition period | ||||
from____________________ | to_________________________ | |||
Commission File Number: 0-261
ALICO, INC. |
(Exact name of registrant as specified in its charter) |
Florida | 59-0906081 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
10070 Daniels Interstate Court | ||||
Suite 100 | Fort Myers | FL | 33913 | |
(Address of principal executive offices) | (Zip Code) | |||
(239) | 226-2000 |
(Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | ALCO | NASDAQ Global Select Market |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐Yes ☑ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐Yes ☑ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | ☐ | Accelerated Filer | ☑ |
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ |
Emerging Growth Company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the voting and nonvoting common equity held by non-affiliates based on the closing price, as quoted on the Nasdaq Global Select Market as of March 29, 2019 (the last business day of Alico’s most recently completed second fiscal quarter) was $95,991,356. Solely for the purposes of this calculation, the registrant has elected to treat all executives, officers and greater than 10% stockholders as affiliates of the registrant. There were 7,475,200 shares of common stock outstanding at December 2, 2019.
Documents Incorporated by Reference:
Portions of the Proxy Statement of Registrant for the 2020 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the Registrant's fiscal year), are incorporated by reference in Part III of this report.
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ALICO, INC.
FORM 10-K
For the fiscal year ended September 30, 2019
PART I | |
PART II | |
PART III | |
PART IV | |
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Cautionary Statement
This Annual Report on Form 10-K contains certain “forward-looking statements,” as such term is defined in Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). They are based on management’s current expectations and assumptions regarding our business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. These forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as “may,” “will,” “could,” “should,” “would,” “believes,” “expects,” “anticipates”, “estimates”, “projects,” “intends,” “plans” and other words and terms of similar substance in connection with discussions of future operating or financial performance. Such forward-looking statements include, but are not limited to, statements regarding future actions, business plans and prospects, prospective products, trends, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, the outcome of contingencies, such as legal proceedings, plans relating to dividends, government regulations, the adequacy of our liquidity to meet our needs for the foreseeable future and our expectations regarding market conditions.
As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. Our actual results may vary materially from those expressed or implied in our forward-looking statements. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.
We undertake no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the U.S. Securities and Exchange Commission ("SEC"). We provide in Item 1A, “Risk Factors,” a cautionary discussion of certain risks and uncertainties related to our businesses. These are factors that we believe, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 21E of the Exchange Act. In addition, the operation and results of our business are subject to risks and uncertainties identified elsewhere in this Annual Report on Form 10-K as well as general risks and uncertainties such as those relating to general economic conditions. You should understand that it is not possible to predict or identify all such risks. Consequently, you should not consider such discussion to be a complete discussion of all potential risks or uncertainties.
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PART I
Item 1. Business
Alico, Inc. (“Alico”) was incorporated under the laws of the state of Florida in 1960. Collectively with its subsidiaries (the "Company", "we", "us" or "our"), our business and operations are described below. For detailed financial information with respect to our business and our operations, see Management’s Discussion and Analysis of Financial Condition and Results of Operations which is included in Item 7 in this Annual Report on Form 10-K, and the accompanying Consolidated Financial Statements and the related Notes, which are included in Item 8. In addition, general information concerning our Company can be found on our website, the internet address of which is http://www.alicoinc.com. All of our filings with the U.S. Securities and Exchange Commission (the "SEC") including, but not limited to, the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments thereto, are available free of charge on our website as soon as reasonably practicable after such material is electronically filed or furnished with the SEC. Our recent press releases and information regarding corporate governance, including the charters of our audit, compensation, executive and nominating governance committees, as well as our code of business conduct and ethics are also available to be viewed or downloaded electronically at http://www.alicoinc.com. Unless explicitly stated herein, the information on our website is not incorporated by reference into this Annual Report on Form 10-K and the Company disclaims any such incorporation by reference.
Overview
Alico is an agribusiness with a legacy of achievement and innovation in citrus and conservation. The Company owns approximately 111,000 acres of land in eight Florida counties (Charlotte, Collier, DeSoto, Glades, Hardee, Hendry, Highlands and Polk) including approximately 90,000 acres of mineral rights. Our principal lines of business are citrus groves and conservation.
Alico is one of the largest citrus producers in the United States of America.
Alico, Inc. operates two divisions: Alico Citrus, a citrus producer, and Water Resources and Other Operations, a leading water storage and environmental services division.
The Company manages its land based upon its primary usage and reviews its performance based upon two primary classifications - Alico Citrus and Water Resources and Other Operations. Other Operations includes a lease for grazing rights, hunting leases, a lease to a third party of an aggregate mine and leases of oil extraction rights to third parties, farm lease revenue and rental income for office space. Alico presents its financial results and the related discussion based upon its two business segments: (i) Alico Citrus and (ii) Water Resources and Other Operations.
Recent Developments
Alico 2.0 Modernization Program
On November 16, 2017, we announced the Alico 2.0 Modernization Program (“Alico 2.0”). This program was intended to transform three legacy businesses (Alico, Orange Co., and Silver Nip) into a single efficient enterprise, Alico Citrus, so we would remain one of the leaders in the U.S. citrus industry. This initiative was to explore every aspect of Alico’s citrus and ranch operations, including corporate and operational cost structures, grove costs, purchasing and procurement, non-performing and under-performing assets, professional fees, and human resources efficiency.
Under this program, Alico expected to reduce its operating costs. Alico has executed on the efficiencies identified and has improved margins through better purchasing, more precise application of selected fertilizers and chemicals, outsourcing work such as harvesting, hauling, and certain caretaking tasks, and by streamlining grove management. We have also deployed a more efficient labor model that is consistent and uniform for field staffing and grove operations and is aligned with the geographical footprint of the citrus groves. This effort has helped to transition us to a high-quality, low-cost producer of citrus now and for future years to come.
In combination with these efforts, the Company worked to maintain operational efficiencies and deploy its resources to solidify the Company's position as a leader in the recovering citrus industry.
Under Alico 2.0, we also decided to divest assets that generated low rates of return and shut down parts of our operations that were not profitable. As a result of Alico 2.0, Alico has generated cash of approximately $57,800,000 through September 30, 2019 from asset sales. This has been facilitated through (i) the sale of its nursery in Gainesville, Florida, (ii) the sale of certain
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underperforming groves, (ii) the sale of its breeding herd, (iv) the sale of certain parcels of land on its Ranch, (v) the sale of certain trailers related to our logistics division, and (vi) the sale of certain real estate assets that were not strategic to our business plan.
In January 2018, the Company sold its breeding herd and leased grazing rights on the Ranch to a third party operator. However, the Company continues to own the property and continues to conduct its long-term dispersed water program and wildlife management programs.
Alico 2.0 also included an enhanced program to plant more citrus trees. The Company planted over 400,000 trees in both the fiscal years ended September 30, 2019 and 2018 to help position the Company for future production growth.
Tender Offer
On September 5, 2018, the Board of Directors approved and Alico announced the commencement of an issuer offer (the “Tender Offer”) to purchase up to $19,999,990 in value of shares of its common stock at a purchase price of $34.00 per share. On October 3, 2018, upon the terms and subject to the conditions described in the Offer to Purchase dated September 5, 2018, Alico repurchased an aggregate of 752,234 shares at a price of $34.00 per share aggregating $25,575,956. These shares represented approximately 9.2% of the total number of shares of the Company’s common stock issued and outstanding as of October 2, 2018. Included in the 752,234 shares were 163,999 shares that the Company elected to purchase pursuant to its right to purchase up to an additional 2% of its outstanding shares of common stock. 734 Investors, LLC, (“734 Investors”) Alico’s largest stockholder from 2013 until November 12, 2019, participated in the Tender Offer by selling a small percentage of its holdings of the Company’s common stock. Members of neither the management team nor the Board of Directors sold any shares directly to the Tender Offer.
Termination Proceedings against Mr. Remy W. Trafelet
On November 19, 2018, Alico, with unanimous approval of the members of the Board of Directors, other than Remy W. Trafelet, notified Mr. Trafelet, who was at the time the Company's President and Chief Executive Officer and a member of the Board of Directors, that it intended to consider terminating his employment for “cause” pursuant to the terms of his employment agreement with the Company and option agreements entered into under the Company's Stock Incentive Plan of 2015 (collectively, the “Compensation Documents”). On November 28, 2018, the parties in the Florida Litigation (as defined below) stipulated to an order which provided, among other things, that pending the resolution of the Delaware Litigation (as defined below), the Board of Directors would not take any action out of the routine day-to-day operations conducted in the ordinary course of business, including removing any corporate officers or directors from positions held as of November 27, 2018.
As described in “Note 16. Commitments and Contingencies” to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K, the parties to the Florida Litigation entered into the Alico Settlement Agreement wherein the parties agreed to promptly dismiss all claims in the Florida Litigation, including those related to the termination proceedings against Mr. Trafelet, and Mr. Trafelet agreed to voluntarily resign as President and Chief Executive Officer and a member of the Company’s Board of Directors, effective upon the execution of the Alico Settlement Agreement.
As contemplated by the Alico Settlement Agreement, on February 11, 2019, the Company entered into the Consulting Agreement with Mr. Trafelet and 3584, Inc. (the "Consultant"). Pursuant to the Consulting Agreement, Mr. Trafelet agreed to make himself available to provide consulting services to the Company through the Consultant for up to 24 months. In exchange for the consulting services, the Consultant is receiving an annual consulting fee of $400,000. If the Company terminates the consulting period (other than in certain specified circumstances), the Company will continue to pay the consulting fees described in the immediately preceding sentence through the balance of the 24-month term.
In addition, as contemplated by the Alico Settlement Agreement, the Company entered into the Registration Rights Agreement with Mr. Trafelet, relating to the Registrable Securities. The Registration Rights Agreement required the Company to, among other things and subject to the terms and conditions thereof, use reasonable best efforts to file with the SEC a registration statement on Form S-3 covering the resale of the Registrable Securities. On October 10, 2019, Mr. Trafelet executed a waiver whereby he waived the S-3 Registration Rights but maintained all other rights arising under the Registration Rights Agreement and all rights arising under Section 14 of the Alico Settlement Agreement.
Management and Board Changes
On April 11, 2019, the Board of Directors announced the appointment of Mr. John E. Kiernan as President and Chief Executive Officer and Mr. Richard Rallo as Chief Financial Officer, both effective July 1, 2019. Additionally, Mr. Benjamin D. Fishman, the Company’s current Interim President, agreed to resign from this position effective July 1, 2019. In addition, on April 11, 2019, Mr. Henry A. Slack, the current Executive Chairman of the Board, informed the Board that he agreed to step down as Executive
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Chairman of the Board, effective July 1, 2019. Mr. Slack’s decision to step down as Executive Chairman of the Board was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Mr. Slack will remain a member of the Board of Directors. The Board appointed Mr. Benjamin D. Fishman, the Company’s current Interim President, to the role of non-employee Executive Chairman of the Board, effective July 1, 2019.
On April 29, 2019, the Board of Directors appointed Mr. Toby K. Purse as a member of the Board of Directors, to serve until the 2020 annual meeting of the Company’s shareholders or until his earlier death, resignation, or removal in accordance with the Amended and Restated Bylaws of the Company. The Board of Directors has affirmatively determined that Mr. Purse qualifies as an independent director under the rules of the Nasdaq Stock Exchange and as defined under applicable law. Mr. Purse has also been appointed to serve as a member of the audit committee of the Board of Directors.
Federal Relief Program
The Company is eligible for Hurricane Irma federal relief programs for block grants that are being administered through the State of Florida. During the fourth quarter of fiscal year 2019 and for the fiscal year ended September 30, 2019, the Company received approximately $15,597,000 under the Florida Citrus Recovery Block Grant (“CRBG”) program. This represents the Part 1 and a portion of the Part 2 reimbursement under the three-part program. Subsequent to fiscal year end 2019, the Company received additional proceeds of approximately $4,136,000 under the Florida CRBG program. This represents another portion of the Part 2 reimbursement under the three-part program. The timing and amount to be received under the remaining portion of the Part 2 and the Part 3 of the program, if any, has not been finalized.
Distribution of Shares by 734 Investors
On November 14, 2019, 734 Investors filed a Form 4 and an amendment to Schedule 13D with the SEC disclosing that on November 12, 2019, it distributed all of its shares of Company common stock previously held by it, consisting of 3,173,405 shares, on a pro rata basis, to its members. Prior to such distribution, 734 Investors was the Company’s largest shareholder.
The Land We Manage
We regularly review our land holdings to determine the best use of each parcel based upon our management expertise. Our total return profile is a combination of operating income potential and long-term appreciation. Land holdings not meeting our total return criteria are considered surplus to our operations and will be sold or exchanged for land considered to be more compatible with our business objectives and total return profile.
Our land holdings and the operating activities in which we engage are categorized in the following table:
Gross Acreage | Operating Activities | |||
Alico Citrus | ||||
Citrus Groves | 45,151 | Citrus Cultivation | ||
Citrus Nursery | 22 | Citrus Tree Development | ||
45,173 | ||||
Water Resources and Other Operations | ||||
Ranch | 64,782 | Leasing and Conservation | ||
Other Land | 1,446 | Mining Lease and Office | ||
66,228 | ||||
Total | 111,401 | |||
Alico Citrus
We own and manage citrus land in DeSoto, Polk, Collier, Hendry, Charlotte, Highlands, and Hardee Counties and engage in the cultivation of citrus trees to produce citrus for delivery to the fresh and processed citrus markets. Alico citrus groves total approximately 45,173 gross acres or 40.5% of our land holdings.
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Our citrus acreage is detailed in the following table:
Net Plantable | ||||||||||||
Producing | Developing | Fallow | Total Plantable | Support & Other | Gross | |||||||
DeSoto County | 15,180 | 1,096 | 482 | 16,758 | 4,650 | 21,408 | ||||||
Polk County | 4,545 | — | — | 4,545 | 2,228 | 6,773 | ||||||
Collier County | 4,261 | — | — | 4,261 | 2,905 | 7,166 | ||||||
Hendry County | 3,546 | 57 | 175 | 3,778 | 1,707 | 5,485 | ||||||
Charlotte County | 1,729 | — | 138 | 1,867 | 676 | 2,543 | ||||||
Highlands County | 1,063 | — | — | 1,063 | 161 | 1,224 | ||||||
Hardee County | 403 | — | — | 403 | 171 | 574 | ||||||
Total | 30,727 | 1,153 | 795 | 32,675 | 12,498 | 45,173 | ||||||
Of the 45,173 gross acres of citrus land we own and manage, approximately 12,498 acres are classified as support and other acreage. Support and other acreage includes acres used for roads, barns, water detention, water retention and drainage ditches integral to the cultivation of citrus trees, but which are not capable of directly producing fruit. In addition, we own a small citrus tree nursery and utilize the trees produced in our own operations. The 32,675 remaining acres are classified as net plantable acres. Net plantable acres are those that are capable of directly producing fruit. These include acres that are currently producing, acres that are developing (acres that are planted with trees too young to commercially produce fruit) and acres that are fallow.
Our Alico Citrus business segment cultivates citrus trees to produce citrus for delivery to the processed and fresh citrus markets. Our sales to the processed market were approximately 95.0%, 93.7% and 91.7% of Alico Citrus revenues for the fiscal years ended September 30, 2019, 2018 and 2017, respectively. We produce Early and Mid-Season varieties, primarily Hamlin oranges, as well as a Valencia variety for the processed market. We deliver our fruit to the processors in boxes which each contains approximately 90 pounds of oranges. Because the processors convert the majority of the citrus crop into orange juice, they generally do not buy their citrus on a per box basis, but rather on a pound solids basis, which is the measure of the soluble solids (sugars and acids) contained in one box of citrus fruit. We produced approximately 46,727,000, 26,513,000 and 42,611,000 pound solids for the fiscal years ended September 30, 2019, 2018 and 2017, respectively, from boxes delivered to processing plants of approximately 7,904,000, 4,702,000 and 7,259,000, respectively. As previously indicated, the falloff in fiscal year 2018 was mostly attributable to the impact of Hurricane Irma.
The average pound solids per box was 5.91, 5.64 and 5.87 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
We generally use multi-year contracts with citrus processors that include pricing structures based on a minimum (“floor”) price with a price increase (“rise”) based on market conditions. Therefore, if pricing in the market is favorable relative to our floor price, we benefit from the incremental difference between the floor and the final market price.
Our citrus produced for the processed citrus market in fiscal year 2019-2020 under our largest agreement is subject to minimum floor price ranging from $2.05 to $2.15 per pound solid and rise price from $2.50 to $2.65 per pound solid. Under this agreement, if the market price is below the floor prices or exceeds the rise prices, then 50% of the shortfall or excess will be deducted from the floor price or added to the rise price. Under our next largest agreement, our citrus produced is subject to a minimum floor price of $2.60 per pound solid and rise price of $3.00 per pound solid. We believe that other markets are available for our citrus products; however, new arrangements may be less favorable than our current contracts.
Our sales to the fresh citrus market constituted approximately 3.0%, 2.6% and 4.6% of our Alico Citrus revenues for the fiscal years ended September 30, 2019, 2018 and 2017, respectively. We produce numerous varieties for the fresh fruit market including grapefruit, navel and other fresh varieties. Generally, our fresh fruit is sold to packing houses by the box and the packing houses are responsible for the harvest and haul of these boxes. We produced approximately 210,000, 125,000 and 328,000 fresh fruit boxes for each of the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
Revenues from our Alico Citrus operations were approximately 97.4%, 96.1% and 95.1% of our total operating revenues for each of the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
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Water Resources and Other Operations
We own and manage land in Collier, Glades, and Hendry Counties and are engaged in land leasing for recreational and grazing purposes, conservation, and mining activities. Our Water Resources and Other Operations land holdings total 66,228 gross acres, or 59.5% of our total acreage.
Our Water Resources and Other Operations acreage is detailed in the following table as of September 30, 2019:
Acreage | ||
Hendry County | 61,680 | |
Glades County | 526 | |
Collier County | 4,022 | |
Total | 66,228 | |
In January 2018, the Company sold its breeding herd and leased grazing rights on the Ranch to a third party operator. The Company continues to own the property and conduct its long-term dispersed water program and wildlife management programs. As part of the sales transaction, the Company expensed all cattle inventory costs that were accumulated at the date of sale.
In fiscal year 2017, our cattle operation was engaged in the production of beef cattle in Hendry and Collier Counties. The breeding herd consisted of approximately 8,700 cows and bulls. We primarily sold our calves to feed yards and yearling grazing operations in the United States. We also sold cattle through local livestock auction markets and to contract cattle buyers in the United States. These buyers provided ready markets for our cattle. Revenues from Water Resources and Other Operations were approximately 2.6%, 3.9% and 4.9% of total operating revenues for each of the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
Our Strategy
Our core business strategy is to maximize stockholder value through continuously improving the return on our invested capital, either by holding and managing our existing land through skilled agricultural production, leasing, or other opportunistic means of monetization, disposing of under productive land or business units and acquiring new land or operations with appreciation potential.
Our objectives are to produce the highest quality agricultural products, create innovative land uses, opportunistically acquire and convert undervalued assets, sell under-productive land and other assets not meeting our total return profile, generate recurring and sustainable profit with the appropriate balance of risk and reward, and exceed the expectations of stockholders, customers, clients and partners.
Our strategy is based on best management practices of our agricultural operations and the environmental and conservation stewardship of our land and natural resources. We manage our land in a sustainable manner and evaluate the effect of changing land uses while considering new opportunities. Our commitment to environmental stewardship is fundamental to the Company’s core beliefs.
Seasonal Nature of Business
As with any agribusiness enterprise, our agribusiness operations and revenues are predominantly seasonal in nature. The following table illustrates the seasonality of our agribusiness revenues:
Fiscal Year | ||||||||||||
Q1 | Q2 | Q3 | Q4 | |||||||||
Ending 12/31 | Ending 3/31 | Ending 6/30 | Ending 9/30 | |||||||||
Oct | Nov | Dec | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sept | |
Harvest Fresh and Early/Mid Varieties of Oranges | ||||||||||||
Harvest Valencia Oranges | ||||||||||||
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Significant Customers
Revenue from Tropicana represented approximately 89%, 87% and 86% of our consolidated revenue for the fiscal years ended September 30, 2019, 2018 and 2017, respectively. The revenue in fiscal year 2019 from Tropicana was generated primarily from two separate contracts. This revenue was generated from the sale of our citrus product in the processed market. No other single customer provided more than 10% of our consolidated revenue in fiscal year 2019, 2018 or 2017.
Competition
The orange and specialty citrus markets are intensely competitive, but no single producer has any significant market power over any market segments, as is consistent with the production of most agricultural commodities. Citrus is grown domestically in several states including Florida, California, Arizona and Texas, as well as foreign countries, most notably Brazil. Competition is impacted by several factors including quality, production, demand, brand recognition, market prices, weather, disease, export/import restrictions and foreign currency exchange rates.
Environmental Regulations
Our operations are subject to various federal, state and local laws regulating the discharge of materials into the environment. Management believes we are in compliance with all such rules including permitting and reporting requirements. Historically, compliance with environmental regulations has not had a material impact on our financial position, results of operations or cash flows.
Management monitors environmental legislation and requirements and makes every effort to remain in compliance with such regulations. In addition, we require lessees of our property to comply with environmental regulations as a condition of leasing.
Employees
As of September 30, 2019, we had 235 full-time employees. Our employees work in the following divisions:
Alico Citrus | 214 |
Water Resources and Other Operations | 0 |
Corporate, General, Administrative and Other | 21 |
Total employees | 235 |
None of our employees are subject to a collective bargaining agreement. We believe that our relations with our employees are good.
Capital Resources and Raw Materials
Management believes that the Company will be able to meet its working capital requirements for at least the next 12 months, and over the long term, through internally generated funds, cash flows from operations, the sale of under-productive land and other assets, our existing lines of credit and access to capital markets. The Company has commitments that provide for lines of revolving credit that are available for our general and corporate use.
Raw materials needed to cultivate the various crops grown by the Company consist primarily of fertilizers, herbicides, insecticides and fuel and are readily available from local suppliers.
Available Information
We will provide electronic copies of our SEC filings free of charge upon request. Additionally, our reports, amendments thereto, proxy statements and other information are also made available, free of charge, on our investor relations website at ir.alicoinc.com as soon as reasonably practicable after we electronically file or furnish such information with the SEC. Any information posted on or linked from our website is not incorporated by reference in this Annual Report on Form 10-K. The SEC also maintains a website at http://www.sec.gov, which contains annual, quarterly and current reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
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Item 1A. Risk Factors
Our business and results of operations are subject to numerous risks and uncertainties, many of which are beyond our control. The following is a description of the known factors that we believe may materially affect our business, financial condition, results of operations or cash flows. They should be considered carefully, in addition to the information set forth elsewhere in this Annual Report on Form 10-K, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data, including the related Notes to the Consolidated Financial Statements in making any investment decisions with respect to our securities. Additional risks or uncertainties that are not currently known to us that we currently deem to be immaterial or that could apply to any company could also materially adversely affect our business, financial condition, results of operations or cash flows.
Risks Related to our Business
Adverse weather conditions, natural disasters and other natural conditions, including the effects of climate change, could impose significant costs and losses on our business.
Fresh produce is vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common and may occur with higher frequency or be less predictable in the future due to the effects of climate change. Unfavorable growing conditions can reduce both crop size and crop quality. In extreme cases, entire harvests may be lost in some geographic areas. Citrus groves are subject to damage from frost and freezes, and this has happened periodically in the recent past, including most recently the impact from Hurricane Irma. In some cases, the fruit is damaged or ruined; in the case of extended periods of cold, the trees can also be damaged or killed. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our citrus groves are subject to damage and loss from disease including but not limited to citrus greening and citrus canker which could negatively impact our business, financial condition, results of operations and cash flows.
Our citrus groves are subject to damage and loss from diseases such as citrus greening and citrus canker. Each of these diseases is widespread in Florida and exists in our citrus groves and in the areas where our citrus groves are located. The success of our citrus business is directly related to the viability and health of our citrus groves.
Citrus greening is one of the most serious citrus plant diseases in the world. Once a tree is infected, its productivity generally decreases. While the disease poses no threat to humans or animals, it has devastated citrus crops throughout the United States and abroad. Named for its green, misshapen fruit, citrus greening disease has now killed millions of citrus plants in the southeastern United States and has spread across the entire country. Infected trees produce fruits that are green, misshapen and bitter, unsuitable for sale as fresh fruit or for juice. Infected trees can die within a few years. At the present time, there is no known cure for citrus greening once trees have become infected. Primarily, as a result of citrus greening, orange production in the State of Florida has continued to drop.
Citrus canker is a disease affecting citrus species and is caused by a bacterium which is spread by contact with infected trees or by windblown transmission. There is no known cure for citrus canker at present although some management practices, including the use of copper-based bactericides, can mitigate its spread and lessen its effect on infected trees; however, there is no assurance that currently available technologies will control such disease effectively.
Both of these diseases pose a significant threat to the Florida citrus industry and to our citrus groves. While we use best management practices to attempt to control diseases and their spread, there can be no assurance that our mitigation efforts will be successful. These diseases can significantly increase our costs which could materially adversely affect our business, financial condition, results of operations and cash flows. Our citrus groves produce the significant majority of our annual operating revenues. A significant reduction in available citrus from our citrus groves could decrease our operating revenues and materially adversely affect our business, financial condition, results of operations and cash flows.
Our citrus groves are geographically concentrated in Florida and the effects of adverse weather conditions including hurricanes and tropical storms could adversely affect our results of operations, financial position and cash flows.
Our citrus operations are concentrated in central and south Florida with our groves located in parcels in DeSoto, Polk, Collier, Hendry, Charlotte, Highlands, and Hardee Counties. Because our groves are located in close proximity to each other, the impact of adverse weather conditions may be material to our results of operations, financial position and cash flows. Florida is particularly susceptible to the occurrence of hurricanes and tropical storms. Depending on where any particular hurricane or tropical storm
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makes landfall, our properties could experience significant, if not catastrophic damage. Hurricanes and tropical storms have the potential to destroy crops and impact citrus production through the loss of fruit and destruction of trees and/or plants either as a result of high winds or through the spread of windblown disease. Such damage could materially affect our citrus operations and could result in a loss of operating revenues from those products for a multi-year period. We seek to minimize hurricane risk by the purchase of insurance contracts, but the majority of our crops remain uninsured. In addition to hurricanes and tropical storms, the occurrence of other natural disasters and climate conditions in Florida, such as tornadoes, floods, freezes, unusually heavy or prolonged rain, droughts and heat waves, could have a material adverse effect on our operations and our ability to realize income from our crops or properties.
A significant portion of our revenues are derived from our citrus business and any adverse event affecting such business could disproportionately harm our business.
Our revenues from our citrus business were approximately 97.4%, 96.1% and 95.1% of our operating revenues in fiscal years 2019, 2018 and 2017, respectively. Our citrus division is one of the largest citrus producers in the United States and because of the significance of the revenues derived from this business, we are more vulnerable to adverse events or market conditions affecting our citrus business which could have a significant impact on our overall results of operations, financial condition and cash flows.
Our business is highly competitive and we cannot assure you that we will maintain our current market share.
Many companies compete in our different businesses and offer products that are similar to our products or are direct competitors to our products. We face strong competition from these and other companies engaged in the agricultural product business.
Important factors with respect to our competitors include the following:
• | Some of our competitors may have greater operating flexibility and, in certain cases, this may permit them |
• | to respond better or more quickly to changes in the industry. |
• | We cannot predict the pricing or promotional actions of our competitors or whether those actions will have a negative effect on us. |
• | Our competitors may have access to substantially greater financial resources, deeper management and agricultural resources, regional, national or global areas that offer agricultural advantages, and enhanced public visibility or reputations. |
There can be no assurance that we will continue to compete effectively with our present and future competitors, and our ability to compete could be materially adversely affected by our debt levels and debt service requirements.
We depend on our relationship with Tropicana for a significant portion of our business. Any disruption in this relationship could harm our sales. Additionally, if certain criteria are not met under one of our contracts with Tropicana, we could experience a significant reduction in revenues and cash flows.
The Company's contracts with Tropicana accounted for 88.6%, 86.6% and 85.6% of the Company's revenues in fiscal years 2019, 2018 and 2017, respectively. The revenue for Tropicana is primarily generated from two contracts. Should there be any change in our current relationship structure, whereby they do not buy our oranges, we would need to find replacement buyers to purchase our remaining crop, which could take time and expense and may result in less favorable terms of sale. The loss of Tropicana as a customer or significant reduction in business with Tropicana may cause a material adverse impact to our financial position, results of operations and cash flows.
Our agricultural products are subject to supply and demand pricing which is not predictable.
Agricultural operations traditionally provide almost all of our operating revenues with citrus being the largest portion and are subject to supply and demand pricing. While according to Nielsen data consumer demand for orange juice has decreased significantly to its lowest level in almost a decade, we have been able to offset the impact of such decline with higher prices based on a lower supply of available oranges. However, there can be no assurance that we will be able to continue to do so if demand continues to decline. Although our processed citrus is subject to minimum pricing, we are unable to predict with certainty the final price we will receive for our products. In some instances the harvest and growth cycle will dictate when such products must be marketed which may or may not be advantageous in obtaining the best price. Excessive supplies tend to cause severe price competition and lower prices for the commodity affected. Limited supply of certain agricultural commodities due to world and domestic market conditions can cause commodity prices to rise in certain situations.
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There is no assurance that Alico 2.0 will continue to provide the cost savings that we have achieved.
On November 16, 2017, we announced Alico 2.0, which we expect will result in a significant citrus grove cost savings and a decline in Alico Citrus’ general and administrative expenses. While the Company has executed on its Alico 2.0 initiatives and achieved significant grove cost savings, there is no assurance that we can maintain these cost levels.
If we are unable to successfully develop and execute our strategic growth initiatives, or if they do not adequately address the challenges or opportunities we face, our business, financial condition and prospects may be adversely affected.
Our success is dependent, in part, on our ability to identify, develop and execute appropriate strategic growth initiatives that will enable us to achieve sustainable growth in the long term. The implementation of our strategic initiatives is subject to both the risks affecting our business generally and the inherent risks associated with implementing new strategies. These strategic initiatives may not be successful in generating revenues or improving operating profit and, if they are, it may take longer than anticipated. As a result and depending on evolving conditions and opportunities, we may need to adjust our strategic initiatives and such changes could be substantial, including modifying or terminating one or more of such initiatives. Termination of such initiatives may require us to write down or write off the value of our investments in them. Transition and changes in our strategic initiatives may also create uncertainty in our employees, customers and partners that could adversely affect our business and revenues. In addition, we may incur higher than expected or unanticipated costs in implementing our strategic initiatives, attempting to attract revenue opportunities or changing our strategies. There is no assurance that the implementation of any strategic growth initiative will be successful, and we may not realize anticipated benefits at levels we project or at all, which would adversely affect our business, financial condition and prospects.
We are subject to the risk of product contamination and product liability claims.
The sale of agricultural products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, we cannot be sure that our agricultural products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability insurance, however, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage.
Our agricultural operations are subject to water use regulations restricting our access to water.
Our operations are dependent upon the availability of adequate surface and underground water. The availability of water is regulated by the state of Florida through water management districts which have jurisdiction over various geographic regions in which our lands are located. Currently, we have permits in place for the next 15 to 20 years for the use of underground and surface water which are adequate for our agricultural needs.
Surface water in Hendry County, where much of our agricultural land is located, comes from Lake Okeechobee via the Caloosahatchee River and a system of canals used to irrigate such land. The Army Corps of Engineers controls the level of Lake Okeechobee and ultimately determines the availability of surface water even though the use of water has been permitted by the state of Florida through the water management district. The Army Corps of Engineers decided in 2010 to lower the permissible level of Lake Okeechobee in response to concerns about the ability of the levee surrounding the lake to restrain rising waters which could result from hurricanes. Changes in availability of surface water use may result during times of drought, because of lower lake levels and could materially adversely affect our agricultural operations, financial condition, results of operations and cash flows.
Changes in immigration laws could impact our ability to harvest our crops.
We engage third parties to provide personnel for our harvesting operations. The availability and number of such workers is subject to decrease if there are changes in the U.S. immigration laws. Immigration reform and enforcement is currently attracting significant attention in the current U.S. administration and U.S. Congress, with enforcement operations taking place across the country, resulting in arrests and detentions of unauthorized workers. If new immigration legislation is enacted in the U.S. and/or if enforcement actions are taken against available personnel, such legislation and/or enforcement activities may contain provisions
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that could significantly reduce the number and availability of workers. Termination of a significant number of personnel who are found to be unauthorized workers or the scarcity of other available personnel to harvest our agricultural products could cause harvesting costs to increase or could lead to the loss of product that is not timely harvested which could have a material adverse effect to our citrus grove business, financial condition, results of operations and cash flows.
Our acquisition of additional agricultural assets and other businesses could pose risks.
We seek to opportunistically acquire new agricultural assets from time to time that we believe would complement our business. For example, in fiscal year 2015 we acquired three Florida citrus properties, including Orange-Co and Silver Nip Citrus, which resulted in our citrus division being one of the largest citrus producers in the United States. While we expect that our past and future acquisitions will successfully complement our business, we may fail to realize all of the anticipated benefits of these acquisitions, which could reduce our anticipated results. We cannot assure that we will be able to successfully identify suitable acquisition opportunities, negotiate appropriate acquisition terms, or obtain any financing that may be needed to consummate such acquisitions or complete proposed acquisitions. Acquisitions by us could result in accounting changes, potentially dilutive issuances of equity securities, increased debt and contingent liabilities, reduce the amount of cash available for dividends, debt service payments, integration issues and diversion of management’s attention, any of which could adversely affect our business, results of operations, financial condition, and cash flows. We may be unable to successfully realize the financial, operational, and other benefits we anticipate from our acquisitions and our failure to do so could adversely affect our business, results of operations, financial condition and cash flows.
Dispositions of our assets may adversely affect our future results of operations.
We also routinely evaluate the benefits of disposing of certain of our assets which could include the exit from lines of business. For example, in November of 2014 we sold significant sugarcane assets and we are no longer involved in the sugarcane business and in January of 2018 we sold our breeding herd and no longer engage in cattle operations. While such dispositions increase the amount of cash available to us, it could also result in a potential loss of significant operating revenues and income streams that we might not be able to replace, makes our business less diversified and could ultimately have a negative impact on our results of operations, financial condition and cash flows.
If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis.
From time to time we dispose of properties in transactions that are intended to qualify as Section 1031 Exchanges. It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully challenged and determined to be currently taxable and we could also be required to pay interest and penalties. As a result, we may be required to borrow funds in order to pay additional income taxes, and the payment of such taxes could cause us to have less cash available. Moreover, it is possible that legislation could be enacted that could modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or not possible for us to dispose of properties on a tax deferred basis.
We may undertake one or more significant corporate transactions that may not achieve their intended results, may adversely affect our financial condition and our results of operations or result in unforeseeable risks to our business.
We continuously evaluate the acquisition or disposition of operating businesses and assets and may in the future undertake one or more significant transactions. Any such acquisitive transaction could be material to our business and could take any number of forms, including mergers, acquisitions, joint ventures and the purchase of equity interests. The consideration for such acquisitive transactions may include, among other things, cash, common stock or equity interests in the Company or our subsidiaries, or a contribution of property or equipment to obtain equity interests, and in conjunction with a transaction we might incur additional indebtedness. We also routinely evaluate the benefits of disposing of certain assets. Such dispositions could take the form of asset sales, mergers or sales of equity interests.
These transactions may present significant risks such as insufficient assets to offset liabilities assumed, potential loss of significant operating revenues and income streams, increased or unexpected expenses, inadequate return of capital, regulatory or compliance issues, the triggering of certain financial covenants in our debt instruments (including accelerated repayment) and unidentified issues not discovered in due diligence. In addition, such transactions could distract management from current operations. As a result of the risks inherent in such transactions, we cannot guarantee that any such transaction will ultimately result in the realization of its anticipated benefits or that it will not have a material adverse impact on our business, financial condition, results of operations or cash flows. If we were to complete such an acquisition, disposition, investment or other strategic transaction, we may require additional debt or equity financing that could result in a significant increase in our amount of debt and our debt service obligations
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or the number of outstanding shares of our common stock, thereby diluting holders of our common stock outstanding prior to such acquisition.
Our citrus business is seasonal.
Our citrus groves produce the majority of our annual operating revenues and the citrus business is seasonal because it is tied to the growing and picking seasons. Historically, the second and third quarters of our fiscal year generally produce the majority of our annual revenues, and our working capital requirements are typically greater in the first and fourth quarters of our fiscal year coinciding with our planting cycles. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year or in future quarters. If our operating revenues in the second and third quarters are lower than expected, it would have a disproportionately large adverse impact on our annual operating results.
We face significant competition in our agricultural operations.
We face significant competition in our agricultural operations both from domestic and foreign producers and do not have any branded products. Foreign growers generally have an equal or lower cost of production, less environmental regulation and in some instances, greater resources and market flexibility than us. Because foreign growers have greater flexibility as to when they enter the U.S. market, we cannot always predict the impact these competitors will have on our business and results of operations. The competition we face from certain foreign suppliers of orange juice is mitigated by a governmentally imposed tariff on orange imports. Accordingly, a reduction in the government’s orange juice tariff could adversely impact our results of operations.
Our earnings are sensitive to fluctuations in market supply and prices and demand for our products.
Excess supplies often cause severe price competition in our industry. Growing conditions in various parts of the world, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product.
Fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. Many of the items involved in our business, such as oranges, must be sold more quickly than other produce our competitors may produce, such as lemons. As such, our competitors may be able to maintain certain items they produce in inventory for longer periods than we are able to maintain our inventory which may offer our competitors strategic advantages when they respond to fluctuations in market supply and demand that are not available to us.
In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. If excess supplies do exist, this could result in reduced pricing or unusable inventory which could adversely impact our results of operations.
Climate change, or legal, regulatory, or market measures to address climate change, may negatively affect our business and operations.
There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on the productivity of our citrus groves, it could have an adverse impact on our business and results of operations. The increasing concern over climate change also may result in more regional, federal, and/or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases. In the event that such regulation is enacted, we may experience significant increases in our costs of operations. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. As a result, climate change could negatively affect our business and operations.
Increases in labor, personnel and benefits costs could adversely affect our operating results.
We primarily utilize labor contractors to harvest and deliver our fruit to outside packing facilities. Our employees and contractors are in demand by other agribusinesses and other industries. Shortages of labor, particularly as a result of the recent low unemployment rate in the United States and in Florida in particular, could delay our harvesting or orange processing activities or could result in increases in labor costs.
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We and our labor contractors are subject to government mandated wage and benefit laws and regulations. In addition, current or future federal or state healthcare legislation and regulation, including the Affordable Care Act, may increase our medical costs or the medical costs of our labor contractors that could be passed on to us.
Increases in commodity or raw product costs, such as fuel and chemical costs, could adversely affect our operating results.
Many factors may affect the cost and supply of citrus, including external conditions, commodity market fluctuations, changes in governmental laws and regulations, tariffs, agricultural programs, severe and prolonged weather conditions and natural disasters. Increased costs for products can negatively impact our operating results and there can be no assurance that they will not adversely affect our operating results in the future.
We are subject to transportation risks.
We depend on third party providers of transportation and have no control over such third parties. An extended interruption in our ability to harvest and haul our products could have a material adverse effect on our business, financial condition and results of operations. Similarly, any extended disruption in the distribution of our products could have a material adverse effect on our business, financial condition and results of operations. While we believe we are adequately insured and would attempt to transport our products by alternative means if we were to experience an interruption due to strike, natural disasters or otherwise, we cannot be sure that we would be able to do so or be successful in doing so in a timely and cost-effective manner.
We benefit from reduced real estate taxes due to the agricultural classification of a majority of our land. Changes in the classification or valuation methods employed by county property appraisers could cause significant changes in our real estate property tax liabilities.
In the fiscal years ended September 30, 2019, 2018 and 2017 we paid approximately $2,755,000, $3,089,000 and $3,106,000 in real estate taxes, respectively. These taxes were based upon the agricultural use (“Green Belt”) values determined by the county property appraisers in which counties we own land, of approximately $91,312,000, $104,017,000 and $105,496,000 for each of the fiscal years ended September 30, 2019, 2018 and 2017 respectively, which differs significantly from the fair values determined by the county property appraisers of approximately $514,330,000, $537,183,000 and $539,790,000, respectively. Changes in state law or county policy regarding the granting of agricultural classification or calculation of "Green Belt" values or average millage rates could significantly impact our results of operations, cash flows and/or financial position.
Liability for the use of fertilizers, pesticides, herbicides and other potentially hazardous substances could increase our costs.
Our agricultural business involves the use of herbicides, fertilizers and pesticides, some of which may be considered hazardous or toxic substances. We may be deemed liable and have to pay for the costs or damages associated with the improper application, accidental release or the use or misuse of such substances. Our insurance may not be adequate to cover such costs or damages, or may not continue to be available at a price or under terms that are satisfactory to us. In such cases, if we are required to pay significant costs or damages, it could materially adversely affect our business, results of operations, financial condition and cash flows.
Compliance with applicable environmental laws may substantially increase our costs of doing business which could reduce our profits.
We are subject to various laws and regulations relating to the operation of our properties, which are administered by numerous federal, state and local governmental agencies. We face a potential for environmental liability by virtue of our ownership of real estate property. If hazardous substances (including herbicides and pesticides used by us or by any persons leasing our lands) are discovered emanating from any of our lands and the release of such substances presents a threat of harm to the public health or the environment, we may be held strictly liable for the cost of remediation of these hazardous substances. In addition, environmental laws that apply to a given site can vary greatly according to the site’s location, its present and former uses, and other factors such as the presence of wetlands or endangered species on the site. Management monitors environmental legislation and requirements and makes every effort to remain in compliance with such regulations. Furthermore, we require lessees of our properties to comply with environmental regulations as a condition of leasing. We also purchase insurance for environmental liability when it is available; however, these insurance contracts may not be adequate to cover such costs or damages or may not continue to be available at prices and terms that would be satisfactory. It is possible that in some cases the cost of compliance with these environmental laws could exceed the value of a particular tract of land, make it unsuitable for use in what would otherwise be its highest and best use, and/or be significant enough that it would materially adversely affect us.
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Our business may be adversely affected if we lose key employees.
We depend to a large extent on the services of certain key management personnel. These individuals have extensive experience and expertise in the business lines and segments in which they work. The loss of any of these individuals could have a material adverse effect on our businesses. We do not maintain key-man life insurance with respect to any of our employees. Our success will be dependent on our ability to continue to attract, employ and retain skilled personnel in our business lines and segments.
Inflation can have a significant adverse effect on our operations.
Inflation can have a major impact on our citrus operations. The citrus operations are most affected by escalating costs and unpredictable revenues and very high irrigation water costs. High fixed water costs related to our citrus lands will continue to adversely affect earnings. Prices received for many of our products are dependent upon prevailing market conditions and commodity prices. Therefore, it is difficult for us to accurately predict revenue, just as we cannot pass on cost increases caused by general inflation, except to the extent reflected in market conditions and commodity prices.
We incur increased costs as a result of being a publicly traded company.
As a company with publicly traded securities, we have incurred, and will continue to incur, significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as rules promulgated by the SEC and Nasdaq, requires us to adopt corporate governance practices applicable to U.S. public companies. These laws, rules and regulations may increase our legal and financial compliance costs, which could adversely affect the trading price of our common stock.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to customers, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.
Computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our systems and databases or otherwise exploit any security vulnerabilities of our systems and databases. In addition, sophisticated hardware and operating system software and applications that we develop internally or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, distribution or other critical functions.
Portions of our information technology infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to track sales and could interrupt other operational or financial processes, which in turn could adversely affect our financial results, stock price and reputation.
Risks Related to Our Indebtedness
We maintain a significant amount of indebtedness which could adversely affect our financial condition, results of operations or cash flows and may limit our operational and financing flexibility and negatively impact our business.
As of September 30, 2019, we had approximately $163,000,000 in principal amount of indebtedness outstanding under our secured credit facilities and line of credit and an additional $94,500,000 is available under our revolving lines of credit. Our loan agreements, and other debt instruments we may enter into in the future, may have negative consequences to us and could limit our business because we will use a substantial portion of our cash flows from operations to pay debt service costs which will reduce the funds available to us for corporate and general expenses and it may make us more vulnerable to economic downturns and adverse developments in our business. Our loan agreements require us to comply with various restrictive covenants and some contain financial covenants that require us to comply with specified financial ratios and tests. Our failure to meet these covenants could result in default under these loan agreements and would result in a cross-default under other loan agreements. In the event of a default and our inability to obtain a waiver of the default, all amounts outstanding under loan agreements could be declared immediately due and payable. Our loan agreements also contain various covenants that limit our ability to engage in specified
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types of transactions. We expect that we will depend primarily upon our citrus operations to provide funds to pay our corporate and general expenses and to pay any amounts that may become due under any credit facilities and any other indebtedness we may incur. In addition, there are factors beyond our control that could negatively affect our citrus business revenue stream. Our ability to make these payments depends on our future performance, which will be affected by various financial, business, macroeconomic and other factors, many of which we cannot control.
We may be unable to generate sufficient cash flow to service our debt obligations.
To service our debt, we require a significant amount of cash. Our ability to generate cash, make scheduled payments or refinance our obligations depends on our successful financial and operating performance. Our financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions and various financial, business and other factors, many of which are beyond our control. These factors include among others:
• | economic and competitive conditions |
• | changes in laws and regulations |
• | operating difficulties, increased operating costs or pricing pressures we may experience; and |
• | delays in implementing any strategic projects |
If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. If we are required to take any actions referred to above, it could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure investors that we would be able to take any of these actions on terms acceptable to us, or at all, or that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt agreements.
Some of our debt is based on variable rates of interest, which could result in higher interest expenses in the event of an increase in the interest rates.
Our credit facility and certain of our term loans that we have currently bear interest at variable rates, which will generally change as interest rates change. We bear the risk that the rates we are charged by our lenders will increase faster than the earnings and cash flow of our business, which could reduce profitability, adversely affect our ability to service our debt, cause us to breach covenants contained in our credit facility and term loans, any of which could materially adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to our Common Stock
Our common stock has low trading volume and the distribution of all of the shares of our common stock owned by 734 Investors to its members has the effect of increasing the Company’s public float and such increase may have a material adverse effect on the market price of our common stock.
Although our common stock trades on the Nasdaq Global Select Market, it is thinly traded and our average daily trading volume is low compared to the number of shares of common stock we have outstanding. The low trading volume of our common stock can cause our stock price to fluctuate significantly as well as make it difficult for a stockholder to sell their common shares quickly. As a result of our stock being thinly traded and/or our low stock price, institutional investors might not be interested in owning our common stock.
On November 12, 2019, 734 Investors effected a distribution of all of the shares of our common stock owned by 734 Investors to its members. The distribution of Alico shares of common stock by 734 Investors to its members has the effect of increasing the Company’s public float and such increase may have a material adverse effect on the market price of the common stock, which in turn could have a material adverse effect on our ability to obtain future funding, if needed, as well as create a potential market overhang.
We may not be able to continue to pay or maintain our cash dividends on our common stock and the failure to do so may negatively affect our share price.
We have historically paid regular quarterly dividends to the holders of our common stock. Our ability to pay cash dividends depends on, among other things, our cash flows from operations, our cash requirements, our financial condition, the degree to which we are/or become leveraged, contractual restrictions binding on us, provisions of applicable law and other factors that our Board of Directors may deem relevant. There can be no assurance that we will generate sufficient cash from continuing operations in the
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future, or have sufficient cash surplus or net profits to pay dividends on our common stock. Our dividend policy is based upon our directors’ current assessment of our business and the environment in which we operate and that assessment could change based on business developments (which could, for example, increase our need for capital expenditures) or new growth opportunities. Our Board of Directors may, in its discretion, decrease the level of cash dividends or entirely discontinue the payment of cash dividends. The reduction or elimination of cash dividends may negatively affect the market price of our common stock.
There can be no assurance that we will resume the repurchase of shares of our common stock.
In fiscal year 2017, our Board of Directors authorized the repurchase of up to $7,000,000 of the Company’s common stock in two separate authorizations. In March 2017, our Board of Directors authorized the repurchase of up to $5,000,000 of the Company’s common stock beginning March 9, 2017 and continued through March 9, 2019. In May 2017, our Board of Directors authorized the repurchase of up to an additional $2,000,000 of the Company’s common stock beginning May 24, 2017 and continued through May 24, 2019. There can be no assurance that we will repurchase shares in the future in any particular amounts or at all. A reduction in, or elimination of, share repurchases could have a negative effect on our share price.
If we were to conduct a tender offer or engage in a share repurchase program, holders of our securities would be subject to certain risks associated with a decrease in the outstanding number of shares of our common stock.
In September 2018 the Company announced the commencement of the Tender Offer. During the Tender Offer the Company repurchased an aggregate of 752,234 shares at a price of $34.00 per share aggregating $25,575,956. These shares represented approximately 9.2% of the total number of shares of the Company’s common stock issued and outstanding as of October 2, 2018. While we have no plans to conduct another tender offer at this time, we may conduct another tender offer or engage in the repurchase of our shares in the future. Shareholders could be adversely affected by a reduction in our “public float,” that is, the number of shares owned by outside shareholders and available for trading in the securities markets, if the Company makes future tender offers or private or open market repurchases of its shares. Although the Company is not currently pursuing a tender offer, there are no assurances that our Board of Directors will not authorize the Company to do so in the future. Engaging in a tender offer or repurchase program in the future could have a negative effect on our share price.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of September 30, 2019, Alico owned 111,401 acres of land located in eight counties in Florida. Acreage in each county and the primary classification with respect to the present use of these properties is shown in the following table:
Total | Hendry | Polk | Collier | DeSoto | Glades | Charlotte | Hardee | Highlands | ||||||||||
Alico Citrus: | ||||||||||||||||||
Citrus Groves | 45,151 | 5,485 | 6,773 | 7,166 | 21,386 | — | 2,543 | 574 | 1,224 | |||||||||
Citrus Nursery | 22 | — | — | — | 22 | — | — | — | — | |||||||||
Total Citrus Groves | 45,173 | 5,485 | 6,773 | 7,166 | 21,408 | — | 2,543 | 574 | 1,224 | |||||||||
Water Resources and Other Operations | 64,782 | 60,760 | — | 4,022 | — | — | — | — | — | |||||||||
Mining | 526 | — | — | — | — | 526 | — | — | — | |||||||||
Other | 920 | 920 | — | — | — | — | — | — | — | |||||||||
Total | 111,401 | 67,165 | 6,773 | 11,188 | 21,408 | 526 | 2,543 | 574 | 1,224 | |||||||||
Approximately 51,000 acres of the properties listed are encumbered by credit agreements totaling approximately $163,000,000 as of September 30, 2019. For a more detailed description of the credit agreements and collateral please see Note 6. “Long-Term Debt and Lines of Credit” to the Company’s fiscal year 2019 consolidated financial statements.
The Company currently collects mining royalties on approximately 526 acres of land located in Glades County, Florida. These royalties do not represent a significant portion of operating revenues or gross profits.
Item 3. Legal Proceedings
Florida Litigation
On November 16, 2018, 734 Agriculture, RCF 2014 Legacy LLC, Delta Offshore Master II, LTD. and Mr. Remy W. Trafelet (the “Trafelet Parties”), who was at the time the Company's President and Chief Executive Officer and a member of the Board of Directors, filed a lawsuit against Messrs. George R. Brokaw, Henry R. Slack, W. Andrew Krusen and Greg Eisner, members of the Board of Directors, in the Circuit Court (the “Circuit Court”) for Hillsborough County, Florida (the “Florida Litigation”). The Trafelet Parties sought, among other things, a declaration that (1) a purported stockholder action by written consent, delivered to the Company in the name of 734 Investors and the plaintiffs in the Florida Litigation on November 11, 2018 (the “Purported Consent”) was valid and binding, (2) the resolutions passed at a meeting of the Board of Directors on November 12, 2018, to, among other things, constitute an ad hoc committee of the Board of Directors to consider, evaluate and make any and all determinations, and to take any and all actions, on behalf of the Board of Directors, in connection with the Purported Consent were null and void and (3) the four defendants in the Florida Litigation were properly removed from the Board of Directors by the Purported Consent. On November 27, 2018, the Circuit Court denied without prejudice plaintiffs’ motion for a temporary restraining order and an affirmative injunction restoring Mr. Trafelet from administrative leave to active status in his capacity as President and CEO of the Company.
On November 28, 2018, the parties in the Florida Litigation stipulated to an order which provided, pending the resolution of the Delaware Litigation (as defined below), that (1) the record date for the Purported Consent was stayed indefinitely, and (2) Mr. Trafelet and the Company’s Board of Directors should not take any action out of routine day-to-day operations conducted in the ordinary course of business, including any action to change the corporate governance of Alico or removing any corporate officers or directors from positions held as of November 27, 2018.
On December 6, 2018, the Trafelet Parties filed an amended complaint in the Florida Litigation which added the Company and Benjamin D. Fishman, a member of the Board of Directors, as defendants. On December 21, 2018, the Trafelet Parties filed a
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renewed motion for a preliminary injunction restoring Mr. Trafelet from administrative leave to active status in his capacity as President and CEO of the Company. On January 14, 2019, the defendants in the Florida Litigation filed an opposition to plaintiffs’ renewed motion for a preliminary injunction. On January 18, 2019, the defendants in the Florida Litigation filed a motion to dismiss the plaintiffs’ amended complaint.
On February 11, 2019, the parties to the Florida Litigation entered into a settlement agreement (the “Alico Settlement Agreement”) wherein the parties agreed to promptly dismiss all claims in the Florida Litigation. Pursuant to the Alico Settlement Agreement, Mr. Trafelet agreed to voluntarily resign as President and Chief Executive Officer and as a member of the Board of Directors, effective upon the execution of the Alico Settlement Agreement.
As contemplated by the Alico Settlement Agreement, on February 11, 2019, the Company entered into a consulting agreement (the “Consulting Agreement”) with Mr. Trafelet and 3584 Inc., an entity controlled by Mr. Trafelet (the “Consultant”). Pursuant to the Consulting Agreement, Mr. Trafelet agreed to make himself available to provide consulting services to the Company through the Consultant for up to 24 months. In exchange for the consulting services, the Consultant is receiving an annual consulting fee of $400,000. If the Company terminates the consulting period (other than in certain specified circumstances), the Company will continue to pay the consulting fees described in the immediately preceding sentence through the balance of the 24-month term. As such, the Company recorded the $800,000 as expense in the quarter ended March 31, 2019.
In addition, on February 11, 2019, as contemplated by the Alico Settlement Agreement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with Mr. Trafelet, relating to the shares of the Company’s common stock directly held by the Trafelet Parties as of February 11, 2019 (the “Registrable Securities”). The Registration Rights Agreement required the Company to, among other things and subject to the terms and conditions thereof, use reasonable best efforts to file with the SEC a registration statement on Form S-3 covering the resale of the Registrable Securities. On October 10, 2019, Mr. Trafelet executed a waiver whereby he waived the S-3 Registration Rights but maintained all other rights arising under the Registration Rights Agreement and all rights arising under Section 14 of the Alico Settlement Agreement.
Delaware Litigation
On November 20, 2018, members of 734 Investors filed a lawsuit against 734 Agriculture and Mr. Trafelet, who was at the time the Company's President and Chief Executive Officer and a member of the Board of Directors in the Delaware Court of Chancery (the "Delaware Court"), captioned Arlon Valencia Holdings v. Trafelet, C.A. No. 2018-0842-JTL (the “Members’ Delaware Litigation”). The plaintiffs sought, among other things, a declaration that (1) 734 Agriculture was validly replaced as the managing member of 734 Investors pursuant to the Amended and Restated Limited Liability Company Operating Agreement of 734 Investors (the “LLC Agreement”) and the November 19, 2018 resolution by written consent to remove 734 Agriculture as managing member of 734 Investors, and to designate Arlon Valencia Holdings, LLC as the new managing member of 734 Investors (the “734 Consent"), and (2) the Purported Consent was invalid under the LLC Agreement.
Also, on November 20, 2018, 734 Agriculture filed a lawsuit contesting the 734 Consent in the Delaware Court, captioned 734 Agriculture v. Arlon Valencia Holdings, LLC, C.A. No. 2018-0844-JTL (the “734 Delaware Litigation”). On November 27, 2018, the Delaware Court entered a stipulated order consolidating the Members’ Delaware Litigation and the 734 Delaware Litigation into a single lawsuit, captioned In re 734 Investors, LLC Litigation, Consol. C.A. No. 2018-0844-JTL (the consolidated suit, the “Delaware Litigation”).
On December 5, 2018, the Delaware Court entered a stipulated status quo order which provided, among other things, that 734 Agriculture was to serve as the managing member of 734 Investors during the pendency of the Delaware Litigation. The status quo order also provided that 734 Agriculture would not be permitted to take any actions outside of the ordinary course of business of 734 Investors without the consent of two-thirds of the membership interests of 734 Investors, including exercising any voting rights with respect to any shares of the Company’s common stock beneficially owned by 734 Investors.
On February 11, 2019, Mr. Trafelet, 734 Agriculture, 734 Investors, and certain members of 734 Investors entered into a settlement agreement (the “734 Investors Settlement Agreement”) wherein the parties agreed to promptly dismiss all claims in the Delaware Litigation. Pursuant to the 734 Investors Settlement Agreement, 734 Agriculture resigned as Managing Member of 734 Investors and Arlon Valencia Holdings, LLC was confirmed as Managing Member of 734 Investors.
From time to time, Alico may be involved in litigation relating to claims arising out of its operations in the normal course of business. There are no other current legal proceedings to which the Company is a party or of which any of its property is subject that it believes will have a material adverse effect on its financial position, results of operations or cash flows.
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Item 4. Mine Safety Disclosures
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol ALCO.
Holders
On December 2, 2019 our stock transfer records indicated there were 220 holders of record of our common stock. The number of registered holders includes banks and brokers who act as nominee for “street name” or beneficial holders, each of whom may represent more than one stockholder.
Dividend Policy
The declaration and amount of any actual cash dividend are in the sole discretion of our Board of Directors and are subject to numerous factors that ordinarily affect dividend policy, including the results of our operations and financial position, as well as general economic and business conditions.
The following table presents cash dividends per share of our common stock declared in fiscal years ended September 30, 2019, 2018 and 2017:
Declaration Date | Record Date | Payment Date | Per Common Share |
November 30, 2016 | December 30, 2016 | January 16, 2017 | $0.06 |
February 23, 2017 | March 31, 2017 | April 14, 2017 | $0.06 |
May 23, 2017 | June 30, 2017 | July 15, 2017 | $0.06 |
September 15, 2017 | September 29, 2017 | October 16, 2017 | $0.06 |
November 6, 2017 | December 29, 2017 | January 16, 2018 | $0.06 |
March 14, 2018 | March 30, 2018 | April 13, 2018 | $0.06 |
June 11, 2018 | June 29, 2018 | July 13, 2018 | $0.06 |
September 4, 2018 | September 28, 2018 | October 12, 2018 | $0.06 |
December 14, 2018 | December 28, 2018 | January 11, 2019 | $0.06 |
March 15, 2019 | March 29, 2019 | April 12, 2019 | $0.06 |
June 14, 2019 | June 28, 2019 | July 12, 2019 | $0.06 |
September 13, 2019 | September 27, 2019 | October 11, 2019 | $0.06 |
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Stock Performance Graph
The graph below represents our common stock performance, comparing the value of $100 invested on September 30, 2014 in our common stock, the S&P 500 Index, the S&P Agricultural Products Index and a Company-constructed peer group, which includes Forestar Group, Inc., Limoneira Company, The St. Joe Company, Tejon Ranch Co. and Texas Pacific Land Trust.
INDEXED RETURNS | |||||||||||||
Base Period Sept 14 | |||||||||||||
Years Ending | |||||||||||||
Company Name / Index | Sept 15 | Sept 16 | Sept 17 | Sept 18 | Sept 19 | ||||||||
Alico, Inc. | 100 | 107.08 | 71.44 | 91.56 | 91.33 | 92.66 | |||||||
S&P 500 Index | 100 | 99.39 | 114.72 | 136.07 | 160.44 | 167.27 | |||||||
S&P Agricultural Products Index | 100 | 86.00 | 99.15 | 101.54 | 114.41 | 96.77 | |||||||
Peer Group | 100 | 82.07 | 99.66 | 134.39 | 219.29 | 174.48 | |||||||
(Includes reinvestment of dividends)
Recent Sale of Unregistered Securities
None.
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Issuer Repurchases of Equity Securities
In fiscal year 2017, Alico's Board of Directors authorized the repurchase of up to $7,000,000 of the Company’s common stock in two separate authorizations (the "2017 Authorization"). In March 2017, Alico's Board of Directors authorized the repurchase of up to $5,000,000 of the Company’s common stock beginning March 9, 2017 and continued through March 9, 2019. In May 2017, Alico's Board of Directors authorized the repurchase of up to an additional $2,000,000 of the Company’s common stock beginning May 24, 2017 and continued through May 24, 2019. There can be no assurance that the Company will repurchase shares in the future in any particular amounts or at all. A reduction in, or elimination of, share repurchases could have a negative effect on the Company's share price.
In fiscal year 2016, Alico's Board of Directors authorized the repurchase of up to 50,000 shares of the Company’s outstanding common stock beginning February 18, 2016 and continued through February 17, 2017 (the "2016 Authorization"). For the fiscal year ended September 30, 2017, the Company did not purchase any shares in accordance with the 2016 Authorization.
We adopted Rule 10b5-1 share repurchase plan under the Securities Exchange Act of 1934 (the “Plan”) in connection with share repurchase authorizations. The Plan allows us to repurchase our shares of common stock at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Because repurchases under the Plan are subject to certain pricing parameters, there is no guarantee as to the exact number of common shares that will be repurchased under the Plan or that there will be any repurchases pursuant to the Plan.
There were no purchases of common stock for the 4th quarter in fiscal year 2019 under the 2017 Authorization or otherwise. As a result of the 2017 Authorization expiring on May 24, 2019, there is no availability to repurchase shares of common stock under the 2017 Authorization.
The Company purchased 72,266 shares of common stock in the open market in fiscal year 2018 under the 2017 Authorization at a weighted average price of $30.65 per common share.
On October 3, 2018, the Company completed a tender offer of 752,234 shares at a price of $34.00 per share aggregating $25,575,956. 734 Investors, Alico's largest stockholder from 2013 until November 12, 2019, participated in the tender offer by selling a small percentage of its holdings.
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Item 6. Selected Financial Data
The following tables present selected historical consolidated financial information as of and for each of the fiscal years in the five-year period ended September 30, 2019. The Consolidated Financial Statements as of and for the fiscal years ended September 30, 2019, 2018, 2017, 2016 and 2015 include combined financial statement balances with Silver Nip Citrus, as a result of our common control acquisition in February 2015.
The selected historical financial data presented below should be reviewed in conjunction with our Consolidated Financial Statements and the accompanying Notes thereto, included elsewhere in this Annual Report on Form 10-K.
(in thousands, except per share amounts) | September 30, | ||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||
Selected Statement of Operations Information: | |||||||||||||||
Operating revenues | $ | 122,251 | $ | 81,281 | $ | 129,829 | $ | 144,196 | $ | 153,126 | |||||
Income (loss) from operations | $ | 45,214 | $ | 10,535 | $ | (6,094 | ) | $ | 21,846 | $ | 18,964 | ||||
Net income (loss) attributable to common stockholders | $ | 37,833 | $ | 13,050 | $ | (9,451 | ) | $ | 6,993 | $ | 13,214 | ||||
Basic earnings (loss) per common share | $ | 5.06 | $ | 1.59 | $ | (1.14 | ) | $ | 0.84 | $ | 1.64 | ||||
Diluted earnings (loss) per common share | $ | 5.05 | $ | 1.57 | $ | (1.14 | ) | $ | 0.84 | $ | 1.64 | ||||
Cash dividends declared per common share | $ | 0.24 | $ | 0.24 | $ | 0.24 | $ | 0.24 | $ | 0.24 | |||||
Selected Balance Sheet Information: | |||||||||||||||
Cash and cash equivalents and restricted cash | $ | 23,838 | $ | 32,260 | $ | 3,395 | $ | 6,625 | $ | 5,474 | |||||
Property and equipment, net | $ | 345,648 | $ | 340,403 | $ | 349,337 | $ | 379,247 | $ | 381,099 | |||||
Total assets | $ | 417,388 | $ | 423,422 | $ | 419,182 | $ | 455,445 | $ | 460,088 | |||||
Current portion of long-term debt | $ | 5,338 | $ | 5,275 | $ | 4,550 | $ | 4,493 | $ | 4,511 | |||||
Long-term debt, net of current portion | $ | 158,111 | $ | 169,074 | $ | 181,926 | $ | 192,726 | $ | 200,970 | |||||
Total Alico, Inc. stockholders' equity | $ | 194,303 | $ | 172,117 | $ | 160,641 | $ | 173,490 | $ | 170,704 | |||||
Noncontrolling interest | $ | 5,095 | $ | 5,478 | $ | 4,728 | $ | 4,773 | $ | 4,807 | |||||
For the fiscal year ended September 30, 2015, net income includes the gain on sale of assets of approximately $13,590,000 related to the sale of real estate, approximately $8,366,000 of interest expense, approximately $1,051,000 loss on extinguishment of debt related to the refinancing of our debt obligations, approximately $1,145,000 gain on bargain purchase related to acquisition of citrus business and an impairment charge of approximately $541,000 on an asset held for sale.
For the fiscal year ended September 30, 2016, net income includes the gain on sale of assets of approximately $618,000 related to the sale of real estate and approximately $9,893,000 of interest expense.
For the fiscal year ended September 30, 2017, net loss includes inventory casualty loss and net realizable adjustment of approximately $14,688,000 as a result of Hurricane Irma, additional asset impairments of long-lived assets of approximately $9,346,000, and interest expense of approximately $9,141,000. The net loss was partially offset by a gain on sale of assets of approximately $2,181,000.
For the fiscal year ended September 30, 2018, net income includes the gain on sale of assets of approximately $11,041,000 related to the sale of real estate, property and equipment and assets held for sale, and insurance proceeds received in the amount of approximately $9,429,000 relating to damages from Hurricane Irma. Net income also includes a one-time non-cash deferred income tax benefit of approximately $9,847,000, which resulted from the remeasurement of the Company's net deferred tax liabilities due to the 21% corporate tax rate that was enacted December 22, 2017, and the expiration of a capital loss carryforward, which expired at September 30, 2018, of approximately $5,634,000, resulting in an additional income tax expense. Additionally, net income includes approximately $8,561,000 of interest expense and $3,349,000 of impairments relating to net realizable adjustment on inventory and long-lived assets.
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For the fiscal year ended September 30, 2019, net income includes a gain on sale of assets of approximately $13,166,000 related to the sale of real estate, property and equipment and assets held for sale. Net income also includes insurance proceeds received of approximately $486,000 in additional property and casualty claims reimbursement relating to Hurricane Irma and federal relief proceeds of approximately $15,597,000 under the Florida Citrus Recovery Block Grant (“CRBG”) program relating to Hurricane Irma. Additionally, net income includes approximately $7,180,000 of interest expense and $1,204,000 relating to net realizable adjustment on inventory and impairments of long-lived assets.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes thereto.
Cautionary Statement Regarding Forward-Looking Information
We provide forward-looking information in this Annual Report on Form 10-K, particularly in this Management’s Discussion and Analysis and Results of Operations, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Annual Report on Form 10-K that are not historical facts are forward-looking statements. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on our current expectations, estimates and projections about our business based, in part, on assumptions made by our management and can be identified by terms such as “plans,” “expect,” “may,” "anticipate,” “intend,” “should be,” “will be” “is likely to,” “believes,” and similar expressions referring to future periods. Alico believes the expectations reflected in the forward-looking statements are reasonable but cannot guarantee future results, level of activity, performance or achievements. Actual results may differ materially from those expressed or implied in the forward-looking statements. Therefore, Alico cautions you against relying on any of these forward-looking statements. Factors which may cause future outcomes to differ materially from those foreseen in forward-looking statements include, but are not limited to: changes in laws, regulation and rules; weather conditions that affect production, transportation, storage, demand, import and export of fresh product and their by-products; increased pressure from diseases including citrus greening and citrus canker, as well as insects and other pests; disruption of water supplies or changes in water allocations; market pricing of citrus; pricing and supply of raw materials and products; market responses to industry volume pressures; pricing and supply of energy; changes in interest rates; availability of financing for land development activities and other growth and corporate opportunities; onetime events; acquisitions and divestitures; seasonality; our ability to achieve the anticipated cost savings under the Alico 2.0 Modernization program; labor disruptions; inability to pay debt obligations; inability to engage in certain transactions due to restrictive covenants in debt instruments; government restrictions on land use; changes in agricultural land values; market and pricing risks due to concentrated ownership of stock market and pricing risks due to concentrated ownership of stock; the Company's receipt of future funding from the state of Florida in connection with water retention projects; any Federal relief received in the future by the Company in connection with Hurricane Irma; any reduction in the public float resulting from the 2018 tender offer or any subsequent repurchases of common stock by the Company; recent changes in the Equity Plan awards to Employees; continuation of the Company's dividend policy; expressed desire of certain of our stockholders to liquidate their shareholdings by virtue of past market sales of common stock by sales of common stock or by way of future transactions; political changes and economic crises; competitive actions by other companies; changes in dividends; increased competition from international companies; changes in environmental regulations and their impact on farming practices; the ability to secure permits for the Water Storage Contract and Project from the South Florida Water Management District; the land ownership policies of governments; changes in government farm programs and policies and international reaction to such programs; changes in pricing calculations with our customers; fluctuations in the value of the U. S. dollar, interest rates, inflation and deflation rates; changes in and effects of crop insurance programs, global trade agreements, trade restrictions and tariffs; and soil conditions, harvest yields, prices for commodities, and crop production expenses. These assumptions are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those Risks Factors included in Part I, Item 1A and elsewhere in this Annual Report on Form 10-K.
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Introduction
Alico, Inc. (“Alico”), together with its subsidiaries (collectively, the “Company", "we", "us" or "our”), is a holding company with assets and related operations in agriculture, land management and natural resources. We are a Florida agribusiness and land management company with a legacy of achievement and innovation in citrus, cattle and resource conservation. We own approximately 111,000 acres of land in eight Florida counties which includes approximately 90,000 acres of mineral rights. Our principal lines of business are now citrus groves and water storage and other operations, which include environmental services, land leasing and related support operations. Prior to the sale of our breeding herd in January 2018, the Company’s business line also included cattle ranching. Our mission is to create value for our customers and stockholders by managing existing lands to their optimal current income and total returns. Alico opportunistically acquires new agricultural assets and produces high quality agricultural products while exercising responsible environmental stewardship.
Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of results of operations, financial condition and changes in financial condition for the periods presented. This MD&A is organized as follows:
• | Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition. |
• | Consolidated Results of Operations. This section provides an analysis of our results of operations for the three fiscal years ended September 30, 2019. Our discussion is presented on a consolidated basis and includes discussion on future trends by segment. |
• | Liquidity and Capital Resources. This section provides an analysis of our cash flows for each of the three fiscal years ended September 30, 2019 and our outstanding debt, commitments and cash resources as of September 30, 2019. |
• | Critical Accounting Policies. This section identifies those accounting policies that we consider important to our results of operations and financial condition, require significant judgment and involve significant management estimates. Our significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 2, "Summary of Significant Accounting Policies," to the accompanying Consolidated Financial Statements. |
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 its citrus products and grazing and hunting leasing. The Company operates as two business segments and all of its operating revenues are generated in the United States. During the fiscal year ended September 30, 2019, the Company generated operating revenues of approximately $122,251,000, income from operations of approximately $45,214,000, and net income attributable to common stockholders of approximately $37,833,000. Cash provided by operating activities was approximately $48,832,000 during the fiscal year ended September 30, 2019.
Fiscal Year Highlights and Other Developments
Alico 2.0 Modernization Program
On November 16, 2017, we announced the Alico 2.0 Modernization Program (“Alico 2.0”). This program was intended to transform three legacy businesses (Alico, Orange Co., and Silver Nip) into a single efficient enterprise, Alico Citrus, so we would remain one of the leaders in the U.S. citrus industry. This initiative was to explore every aspect of Alico’s citrus and ranch operations, including corporate and operational cost structures, grove costs, purchasing and procurement, non-performing and under-performing assets, professional fees, and human resources efficiency.
Under this program, Alico expected to reduce its operating costs. Alico has executed on the efficiencies identified and has improved margins through better purchasing, more precise application of selected fertilizers and chemicals, outsourcing work such as harvesting, hauling, and certain caretaking tasks, and by streamlining grove management. We have also deployed a more efficient labor model that is consistent and uniform for field staffing and grove operations and is aligned with the geographical footprint of the citrus groves. This effort has helped to transition us to a high-quality, low-cost producer of citrus which we anticipate will continue for future years to come.
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In combination with these efforts, the Company worked to maintain operational efficiencies and deploy its resources to solidify the Company's position as a leader in the recovering citrus industry.
Under Alico 2.0, we also decided to divest assets that generated low rates of return and shut down parts of our operations that were not profitable. Alico Citrus has generated cash of $57,800,000, under Alico 2.0 through September 30, 2019. This has been facilitated through (i) the shut down and sale of its nursery in Gainesville, Florida, (ii) the sale of certain underperforming groves, (ii) the sale of its breeding herd, (iv) the sale of certain parcels of land on its Ranch, (v) the sale of certain trailers related to our logistics division, and (vi) the sale of certain real estate assets that were not strategic to our business plan.
In January 2018, the Company sold its breeding herd and leased grazing rights on the Ranch to a third party operator. However, the Company continues to own the property and continues to conduct its long-term dispersed water program and wildlife management programs.
Alico 2.0 also included an enhanced program to plant more citrus trees. The Company planted over 400,000 trees in both fiscal year 2019 and 2018 to help position the Company for future production growth.
Tender Offer
On September 5, 2018, the Board of Directors approved and Alico announced the commencement of an issuer offer (the “Tender Offer”) to purchase up to $19,999,990 in value of shares of its common stock at a purchase price of $34.00 per share. On October 3, 2018, upon the terms and subject to the conditions described in the Offer to Purchase dated September 5, 2018, including the ability to increase the aggregate value of shares purchased, Alico repurchased an aggregate of 752,234 shares at a price of $34.00 per share aggregating $25,575,956. These shares represented approximately 9.2% of the total number of shares of the Company’s common stock issued and outstanding as of October 2, 2018. Included in the 752,234 shares were 163,999 shares that the Company elected to purchase pursuant to its right to purchase up to an additional 2% of its outstanding shares of common stock. 734 Investors, LLC, Alico’s largest stockholder from 2013 until November 12, 2019, participated in the Tender Offer by selling a small percentage of its holdings of the Company’s common stock. Members of neither the management team nor the Board of Directors sold any shares directly in the Tender Offer.
Termination Proceedings against Mr. Remy W. Trafelet
On November 19, 2018, Alico, with unanimous approval of the members of the Board of Directors, other than Remy W. Trafelet, notified Mr. Trafelet, who was at the time the Company's President and Chief Executive Officer and a member of the Board of Directors, that it intended to consider terminating his employment for “cause” pursuant to the terms of his employment agreement with the Company and option agreements entered into under the Company's Stock Incentive Plan of 2015 (collectively, the “Compensation Documents”). On November 28, 2018, the parties in the Florida Litigation (as defined below) stipulated to an order which provided, among other things, that pending the resolution of the Delaware Litigation (as defined below), the Board of Directors would not take any action out of the routine day-to-day operations conducted in the ordinary course of business, including removing any corporate officers or directors from positions held as of November 27, 2018.
As described in “Note 16. Commitments and Contingencies” to the condensed consolidated financial statements in Part II Item 8, of this Annual Report on Form 10-K, on February 11, 2019, the parties to the Florida Litigation entered into the Alico Settlement Agreement wherein the parties agreed to promptly dismiss all claims in the Florida Litigation, including those related to the termination proceedings against Mr. Trafelet, and Mr. Trafelet agreed to voluntarily resign as President and Chief Executive Officer and a member of the Company’s Board of Directors, effective upon the execution of the Alico Settlement Agreement.
As contemplated by the Alico Settlement Agreement, on February 11, 2019, the Company entered into the Consulting Agreement with Mr. Trafelet and 3584, Inc. (the "Consultant"). Pursuant to the Consulting Agreement, Mr. Trafelet agreed to make himself available to provide consulting services to the Company through the Consultant for up to 24 months. In exchange for the consulting services, the Consultant is receiving an annual consulting fee of $400,000. If the Company terminates the consulting period (other than in certain specified circumstances), the Company will continue to pay the consulting fees described in the immediately preceding sentence through the balance of the 24-month term.
In addition, as contemplated by the Alico Settlement Agreement, the Company entered into the Registration Rights Agreement with Mr. Trafelet, relating to the Registrable Securities. The Registration Rights Agreement required the Company to, among other things and subject to the terms and conditions thereof, use reasonable best efforts to file with the SEC a registration statement on Form S-3 covering the resale of the Registrable Securities. On October 10, 2019, Mr. Trafelet executed a waiver whereby he waived the S-3 Registration Rights but maintained all other rights arising under the Registration Rights Agreement and all rights arising under Section 14 of the Alico Settlement Agreement.
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Management and Board Changes
On April 11, 2019, the Board of Directors announced the appointment of Mr. John E. Kiernan as President and Chief Executive Officer and Mr. Richard Rallo as Chief Financial Officer, both effective July 1, 2019. Additionally, Mr. Benjamin D. Fishman, the Company’s current Interim President, agreed to resign from this position effective July 1, 2019. In addition, on April 11, 2019, Mr. Henry A. Slack, the current Executive Chairman of the Board, informed the Board that he agreed to step down as Executive Chairman of the Board, effective July 1, 2019. Mr. Slack’s decision to step down as Executive Chairman of the Board was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Mr. Slack will remain a member of the Board of Directors. The Board appointed Mr. Benjamin D. Fishman, the Company’s current Interim President, to the role of non-employee Executive Chairman of the Board, effective July 1, 2019.
On April 29, 2019, the Board of Directors appointed Mr. Toby K. Purse as a member of the Board of Directors, to serve until the 2020 annual meeting of the Company’s shareholders or until his earlier death, resignation, or removal in accordance with the Amended and Restated Bylaws of the Company. The Board of Directors has affirmatively determined that Mr. Purse qualifies as an independent director under the rules of the Nasdaq Stock Exchange and as defined under applicable law. Mr. Purse has also been appointed to serve as a member of the audit committee of the Board of Directors.
Federal Relief Program
The Company is eligible for Hurricane Irma federal relief programs for block grants that are being administered through the State of Florida. During the fourth quarter of 2019 and for the fiscal year ended September 30, 2019, the Company received approximately $15,597,000 under the Florida Citrus Recovery Block Grant (“CRBG”) program. This represents the Part 1 and a portion of the Part 2 reimbursement under a three-part program. Subsequent to fiscal year end 2019, the Company received additional proceeds of approximately $4,136,000 under the Florida CRBG program. This represents another portion of the Part 2 reimbursement under a three-part program. The timing and amount to be received under the remaining portion of Part 2 and Part 3 of the program, if any, has not been finalized.
Distribution of Shares by 734 Investors
On November 14, 2019, 734 Investors filed a Form 4 and an amendment to Schedule 13D with the SEC disclosing that on November 12, 2019, it distributed all of its shares of Company common stock previously held by it, consisting of 3,173,405 shares, on a pro rata basis, to its members. Prior to such distribution, 734 Investors was the Company’s largest shareholder.
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Condensed Consolidated Results of Operations
The following discussion provides an analysis of Alico's results of operations and should be read in conjunction with the accompanying Consolidated Statements of Operations for the fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands) | Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
2019 | 2018 | $ | % | 2018 | 2017 | $ | % | ||||||||||||||||||||||
Operating revenues: | |||||||||||||||||||||||||||||
Alico Citrus | $ | 119,031 | $ | 78,121 | $ | 40,910 | 52.4 | % | $ | 78,121 | $ | 123,441 | $ | (45,320 | ) | (36.7 | )% | ||||||||||||
Water Resources and Other Operations | 3,220 | 3,160 | 60 | 1.9 | % | 3,160 | 6,388 | (3,228 | ) | (50.5 | )% | ||||||||||||||||||
Total operating revenues | 122,251 | 81,281 | 40,970 | 50.4 | % | 81,281 | 129,829 | (48,548 | ) | (37.4 | )% | ||||||||||||||||||
Gross profit (loss): | |||||||||||||||||||||||||||||
Alico Citrus | 59,437 | 26,412 | 33,025 | 125.0 | % | 26,412 | 11,494 | 14,918 | 129.8 | % | |||||||||||||||||||
Water Resources and Other Operations | 923 | (819 | ) | 1,742 | (212.7 | )% | (819 | ) | (2,564 | ) | 1,745 | (68.1 | )% | ||||||||||||||||
Total gross profit | 60,360 | 25,593 | 34,767 | 135.8 | % | 25,593 | 8,930 | 16,663 | 186.6 | % | |||||||||||||||||||
General and administrative expenses | 15,146 | 15,058 | 88 | 0.6 | % | 15,058 | 15,024 | 34 | NM | ||||||||||||||||||||
Income (loss) from operations | 45,214 | 10,535 | 34,679 | 329.2 | % | 10,535 | (6,094 | ) | 16,629 | (272.9 | )% | ||||||||||||||||||
Total other income (expense) | 5,019 | 2,655 | 2,364 | 89.0 | % | 2,655 | (7,248 | ) | 9,903 | (136.6 | )% | ||||||||||||||||||
Income (loss) before income taxes | 50,233 | 13,190 | 37,043 | 280.8 | % | 13,190 | (13,342 | ) | 26,532 | (198.9 | )% | ||||||||||||||||||
Income tax provision (benefit) | 12,783 | 390 | 12,393 | NM | 390 | (3,846 | ) | 4,236 | (110.1 | )% | |||||||||||||||||||
Net income (loss) | 37,450 | 12,800 | 24,650 | 192.6 | % | 12,800 | (9,496 | ) | 22,296 | (234.8 | )% | ||||||||||||||||||
Net loss attributable to noncontrolling interests | 383 | 250 | 133 | 53.2 | % | 250 | 45 | 205 | 455.6 | % | |||||||||||||||||||
Net income (loss) attributable to Alico, Inc. common stockholders | $ | 37,833 | $ | 13,050 | $ | 24,783 | 189.9 | % | $ | 13,050 | $ | (9,451 | ) | $ | 22,501 | (238.1 | )% | ||||||||||||
NM - Not meaningful
The following table presents our operating revenues, by segment, as a percentage of total operating revenues for the fiscal years ended September 30, 2019, 2018 and 2017:
Fiscal Year Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | 2017 | ||||||
Operating revenues: | ||||||||
Alico Citrus | 97.4 | % | 96.1 | % | 95.1 | % | ||
Water Resources and Other Operations | 2.6 | % | 3.9 | % | 4.9 | % | ||
Total operating revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||
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The following discussion provides an analysis of the Company's operating segments:
Alico Citrus
The table below presents key operating measures for the fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands, except per box and per pound solids data) | |||||||||||||||||||||||||||||
Fiscal Year Ended | Fiscal Year Ended | ||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
2019 | 2018 | Unit | % | 2018 | 2017 | Unit | % | ||||||||||||||||||||||
Operating Revenues: | |||||||||||||||||||||||||||||
Early and Mid-Season | $ | 39,574 | $ | 24,309 | $ | 15,265 | 62.8 | % | $ | 24,309 | $ | 45,999 | $ | (21,690 | ) | (47.2 | )% | ||||||||||||
Valencias | 73,480 | 48,865 | 24,615 | 50.4 | % | 48,865 | 67,146 | (18,281 | ) | (27.2 | )% | ||||||||||||||||||
Fresh Fruit | 3,629 | 2,054 | 1,575 | 76.7 | % | 2,054 | 5,735 | (3,681 | ) | (64.2 | )% | ||||||||||||||||||
Purchase and Resale of Fruit | 943 | 809 | 134 | 16.6 | % | 809 | 2,331 | (1,522 | ) | (65.3 | )% | ||||||||||||||||||
Other | 1,405 | 2,084 | (679 | ) | (32.6 | )% | 2,084 | 2,230 | (146 | ) | (6.5 | )% | |||||||||||||||||
Total | $ | 119,031 | $ | 78,121 | $ | 40,910 | 52.4 | % | $ | 78,121 | $ | 123,441 | $ | (45,320 | ) | (36.7 | )% | ||||||||||||
Boxes Harvested: | |||||||||||||||||||||||||||||
Early and Mid-Season | 3,114 | 1,811 | 1,303 | 71.9 | % | 1,811 | 3,215 | (1,404 | ) | (43.7 | )% | ||||||||||||||||||
Valencias | 4,790 | 2,891 | 1,899 | 65.7 | % | 2,891 | 4,044 | (1,153 | ) | (28.5 | )% | ||||||||||||||||||
Total Processed | 7,904 | 4,702 | 3,202 | 68.1 | % | 4,702 | 7,259 | (2,557 | ) | (35.2 | )% | ||||||||||||||||||
Fresh Fruit | 210 | 125 | 85 | 68.0 | % | 125 | 328 | (203 | ) | (61.9 | )% | ||||||||||||||||||
Total | 8,114 | 4,827 | 3,287 | 68.1 | % | 4,827 | 7,587 | (2,760 | ) | (36.4 | )% | ||||||||||||||||||
Pound Solids Produced: | |||||||||||||||||||||||||||||
Early and Mid-Season | 16,873 | 9,194 | 7,679 | 83.5 | % | 9,194 | 17,950 | (8,756 | ) | (48.8 | )% | ||||||||||||||||||
Valencias | 29,854 | 17,319 | 12,535 | 72.4 | % | 17,319 | 24,661 | (7,342 | ) | (29.8 | )% | ||||||||||||||||||
Total | 46,727 | 26,513 | 20,214 | 76.2 | % | 26,513 | 42,611 | (16,098 | ) | (37.8 | )% | ||||||||||||||||||
Pound Solids per Box: | |||||||||||||||||||||||||||||
Early and Mid-Season | 5.42 | 5.07 | 0.35 | 6.9 | % | 5.07 | 5.58 | (0.51 | ) | (9.1 | )% | ||||||||||||||||||
Valencias | 6.23 | 5.99 | 0.24 | 4.0 | % | 5.99 | 6.10 | (0.11 | ) | (1.8 | )% | ||||||||||||||||||
Price per Pound Solids: | |||||||||||||||||||||||||||||
Early and Mid-Season | $ | 2.35 | $ | 2.64 | $ | (0.29 | ) | (11.0 | )% | $ | 2.64 | $ | 2.56 | $ | 0.08 | 3.1 | % | ||||||||||||
Valencias | $ | 2.46 | $ | 2.82 | $ | (0.36 | ) | (12.8 | )% | $ | 2.82 | $ | 2.72 | $ | 0.10 | 3.7 | % | ||||||||||||
Price per Box: | |||||||||||||||||||||||||||||
Fresh Fruit | $ | 17.28 | $ | 16.43 | $ | 0.85 | 5.2 | % | $ | 16.43 | $ | 17.48 | $ | (1.05 | ) | (6.0 | )% | ||||||||||||
Operating Expenses: | |||||||||||||||||||||||||||||
Cost of Sales | $ | 52,037 | $ | 46,477 | $ | 5,560 | 12.0 | % | $ | 46,477 | $ | 84,909 | $ | (38,432 | ) | (45.3 | )% | ||||||||||||
Harvesting and Hauling | 22,208 | 12,921 | 9,287 | 71.9 | % | 12,921 | 21,520 | (8,599 | ) | (40.0 | )% | ||||||||||||||||||
Purchase and Resale of Fruit | 659 | 562 | 97 | 17.3 | % | 562 | 2,134 | (1,572 | ) | (73.7 | )% | ||||||||||||||||||
Other | (15,310 | ) | (8,251 | ) | (7,059 | ) | 85.6 | % | (8,251 | ) | 3,384 | (11,635 | ) | (343.8 | )% | ||||||||||||||
Total | $ | 59,594 | $ | 51,709 | $ | 7,885 | 15.2 | % | $ | 51,709 | $ | 111,947 | $ | (60,238 | ) | (53.8 | )% | ||||||||||||
Gross Profit | $ | 59,437 | $ | 26,412 | $ | 33,025 | $ | 26,412 | $ | 11,494 | $ | 14,918 | |||||||||||||||||
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Our citrus groves produce the majority of our annual operating revenues and the citrus grove business is seasonal because it is tied to the growing and harvest season. Historically, the second and third quarters of Alico's fiscal year produce the majority of the annual revenues and working capital requirements are typically greater in the first and fourth quarters of the fiscal year, coinciding with the growing cycles.
The Company sells its Early and Mid-Season and Valencia oranges to processors that convert the majority of the citrus crop into orange juice. They generally buy the citrus on a pound solids basis, which is the measure of the soluble solids (sugars and acids) contained in one box of fruit. Fresh fruit is generally sold to packing houses that purchase the citrus on a per box basis. Other revenues consist of third-party grove caretaking and the purchase and reselling of fruit.
Alico's operating expenses consist primarily of cost of sales and harvesting and hauling 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 varies based upon the number of boxes produced. Other expenses include the period costs of third-party grove caretaking and the purchase and reselling of fruit.
The increase in revenues for the fiscal year ended September 30, 2019, compared to the fiscal year ended September 30, 2018, was primarily related to the negative impact of Hurricane Irma on the prior fiscal year harvest. As a result of Hurricane Irma, which occurred in September 2017, the Company experienced a greater amount of fruit drop and consequently harvested approximately 3,202,000 fewer boxes in fiscal year 2018, as compared to the fiscal year 2019. The Company also saw an overall increase in pound solids per box in the fiscal year 2019, which was 5.91 as compared to 5.64 for the fiscal year 2018. In addition, the increase in revenue, to a smaller extent, was due to a greater number of boxes of fresh fruit being sold for the fiscal year 2019.
The decrease in revenues for the fiscal year ended September 30, 2018, compared to the fiscal year ended September 30, 2017, was primarily due to the impact of Hurricane Irma. The Company experienced a greater amount of fruit drop from the impact of Hurricane Irma and consequently harvested approximately 2,557,000 fewer processed boxes in fiscal year 2018, as compared to the same period in fiscal year 2017. The Company also saw an overall decrease in pound solids per box which went from 5.87 in the fiscal year ended September 30, 2017 to 5.64 in the fiscal year ended September 30, 2018. The Company did experience a smaller fruit drop with respect to its Valencia fruit which is harvested later in the year as compared to the Early and Mid-Season variety and as such realized a smaller overall reduction in boxes produced. In addition, the decrease in revenue, to a smaller extent, was due to fewer boxes of fresh fruit being sold for the fiscal year ended September 30, 2018. The decrease in revenues from purchase and resale of fruit and other revenues reflects the Company’s decision to reduce third party fruit purchases and third party caretaking services.
Total processed boxes harvested in fiscal year 2019 increased by approximately 68.1%, as compared to fiscal year 2018. Pound solids per box increased by approximately 6.9% and approximately 4.0% for the Early and Mid-Season and Valencia oranges, respectively. The combination of these items resulted in approximately 20,214,000 of additional pound solids sold in fiscal year 2019, as compared to fiscal year 2018.
Total processed boxes harvested in fiscal year 2018 declined by approximately 35.2%, as compared to fiscal year 2017. Pound solids per box decreased by approximately 9.1% and approximately 1.8% for the Early and Mid-Season and Valencia oranges, respectively. The combination of these items resulted in approximately 16,098,000 less pound solids sold in fiscal year 2018, as compared to fiscal year 2017.
The USDA, in its November 8, 2019 Citrus Crop Forecast for the 2019-20 harvest season, indicated its expectation that the Florida orange crop will increase from approximately 71,600,000 boxes for the 2018-19 crop year to approximately 74,000,000 boxes for the 2019-20 crop year, an increase of approximately 3.4%. While the production is estimated to be slightly higher than in the prior year, the Company anticipates there will be a continued reduction in the market prices in the 2019-20 harvest season as a result of excess supply from domestic and international growers.
The Company originally estimated its fiscal year 2019 processed boxes would increase by approximately 31%-37% compared to processed boxes for fiscal year 2018. Based on the harvesting of fruit, the Company increased processed box production for fiscal year 2019 by approximately 68% compared to processed boxes for fiscal year 2018. The improvement is the result of both the Early & Mid-season and Valencia variety fruit experiencing less fruit drop then was anticipated upon making the estimate in production.
The increase in gross profit for fiscal year 2019, as compared to fiscal year 2018, was primarily a result of (i) increased citrus revenue and (ii) proceeds received under CRBG program relating to Hurricane Irma, which was recorded as a reduction of operating costs. The increase in operating expenses was due to the increased harvesting and hauling costs, which is the direct result of increased citrus processed box production and (ii) the Company allocating a greater amount of its accumulated costs to its cost of goods sold. Partially offsetting this increase in operating expenses was the Company received a greater amount of funds through the CRBG
30
and insurance claim reimbursement relating to Hurricane Irma in fiscal year 2019, as compared to the same period in fiscal year 2018.
The increase in gross profit for fiscal year 2018, as compared to fiscal year 2017, was primarily driven by a decrease in operating expenses, which was partially offset by a reduction in revenues. The decrease in operating costs is due to (i) the Company allocating a smaller amount of accumulated costs to cost of goods sold, (ii) less harvesting and hauling costs incurred due to fewer boxes being harvested, and (iii) the Company receiving approximately $9,429,000 of insurance proceeds. Partially offsetting this decrease in operating expenses, along with the reduction in revenue, was impairment charges of approximately $3,349,000 relating to net realizable adjustment on inventory and long-lived assets. The decrease in revenue is primarily a result of the impact of Hurricane Irma.
Water Resources and Other Operations
The table below presents key operating measures for the fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands) | |||||||||||||||||||||||||||||
Fiscal Year Ended | Fiscal Year Ended | ||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||
2019 | 2018 | $ | % | 2018 | 2017 | $ | % | ||||||||||||||||||||||
Revenue From: | |||||||||||||||||||||||||||||
Land and other leasing | $ | 2,787 | $ | 2,595 | $ | 192 | 7.4 | % | $ | 2,595 | $ | 2,294 | $ | 301 | 13.1 | % | |||||||||||||
Sale of calves and culls | — | 57 | (57 | ) | (100.0 | )% | 57 | 3,732 | (3,675 | ) | (98.5 | )% | |||||||||||||||||
Other | 433 | 508 | (75 | ) | (14.8 | )% | 508 | 362 | 146 | 40.3 | % | ||||||||||||||||||
Total | $ | 3,220 | $ | 3,160 | $ | 60 | 1.9 | % | $ | 3,160 | $ | 6,388 | $ | (3,228 | ) | (50.5 | )% | ||||||||||||
Operating Expenses: | |||||||||||||||||||||||||||||
Land and other leasing | $ | 1,047 | $ | 1,072 | $ | (25 | ) | (2.3 | )% | $ | 1,072 | $ | 466 | $ | 606 | 130.0 | % | ||||||||||||
Cost of calves sold | — | 1,075 | (1,075 | ) | (100.0 | )% | 1,075 | 3,527 | (2,452 | ) | (69.5 | )% | |||||||||||||||||
Water conservation | 1,206 | 1,619 | (413 | ) | (25.5 | )% | 1,619 | 1,794 | (175 | ) | (9.8 | )% | |||||||||||||||||
Other | 44 | 213 | (169 | ) | (79.3 | )% | 213 | 3,165 | (2,952 | ) | (93.3 | )% | |||||||||||||||||
Total | $ | 2,297 | $ | 3,979 | $ | (1,682 | ) | (42.3 | )% | $ | 3,979 | $ | 8,952 | $ | (4,973 | ) | (55.6 | )% | |||||||||||
Gross Profit (loss) | $ | 923 | $ | (819 | ) | $ | 1,742 | $ | (819 | ) | $ | (2,564 | ) | $ | 1,745 | ||||||||||||||
NM - Not meaningful
Land and other leasing includes lease income from a lease for grazing rights, hunting leases, a lease to a third party of an aggregate mine and leases of oil extraction rights to third parties, and farm lease revenue.
The slight increase in revenues from Water Resources and Other Operations for the fiscal year ended September 30, 2019 is primarily due to the Company recording a full year of grazing lease revenue in fiscal year 2019, while only recording nine months of revenue as the lease for these grazing rights was executed on January 8, 2018, at the time of the sale of the cattle herd. Partially offsetting this increase was a decrease in farm lease revenue as a result of a lease not being renewed in fiscal year 2019. The Company continues to own the property and conduct its dispersed long-term water program and wildlife management programs.
The decrease in revenues from Water Resources and Other Operations for the fiscal year 2018, as compared to fiscal year 2017, was primarily due to selling of Alico's cattle herd in January 2018. All inventory costs that were accumulated at the date of sale were expensed. As part of this transaction, the Company entered into a long-term leasing arrangement with the purchaser for the grazing rights on the Ranch that provides an annual revenue stream of approximately $1,200,000. As a result of these changes, Alico renamed this division to Water Resources and Other Operations to reflect its focus on water storage and nutrient reduction. Alico believes that its dispersed water storage project is the largest and most cost-effective project of its kind in the United States, and believes, once permits from state and federal agencies have been approved, the project will store and prevent large volumes of water from entering the Caloosahatchee River, will remove substantial amounts of nitrogen from the watershed, and will help to rehydrate natural systems that eventually flow south into the Everglades.
31
Water storage and conservation
In December 2012, the South Florida Water Management District ("SFWMD") issued a solicitation request for projects to be considered for the Northern Everglades Payment for Environmental Services Program. In March 2013, the Company submitted its response proposing a dispersed water management project on a portion of its Ranch land to reduce harmful discharges to the Caloosahatchee Estuary.
On December 11, 2014, the SFWMD approved a contract with the Company. The contract term is eleven years and allows up to one year for implementation (design, permitting, construction and construction completion certification) and ten years of operation, whereby the Company will provide water retention services. Payment includes an amount not to exceed $4,000,000 of reimbursement for implementation. In addition, it provides for an annual fixed payment of $12,000,000 for operations and maintenance costs, as long as the project is in compliance with the contract and subject to annual District Board approval of funding. The contract specifies that the District Board has to approve the payments annually and there can be no assurance that it will approve the annual fixed payments. On September 19, 2018, the SFWMD issued a press release announcing the issuance of an Environmental Resource Permit for Alico. The SFWMD release also stated that (i) the issuance of the permit cleared the path for Alico to deliver a regional dispersed water storage project in the Caloosahatchee Watershed that has the opportunity to significantly reduce excessive Lake Okeechobee releases and storm water runoff to the Caloosahatchee Estuary, (ii) Alico has all necessary state approvals to proceed, and (iii) the project is expected to be operational within one year from the start of construction, which is contingent on Alico securing additional local and federal approvals. These approvals include a compatible use agreement from the Natural Resources Conservation Service, as well as approvals from the local water control districts. The project has made substantial progress toward receiving federal authorization from the US Army Corps of Engineers which includes consultation with US Fish & Wildlife Service and the Tribes of Florida. The approved Florida budget for the state’s 2019/2020 fiscal year included funding for the Program. Operating expenses were approximately $1,206,000, $1,619,000 and $1,794,000 for each of the three fiscal years ended September 30, 2019, 2018 and 2017, respectively.
General and Administrative
General and administrative expenses for the fiscal year ended September 30, 2019 was approximately $15,146,000, compared to approximately $15,058,000 for the fiscal year ended September 30, 2018.
The slight increase in general and administrative expenses for the fiscal year ended September 30, 2019, as compared to the fiscal year ended September 30, 2018, was primarily due to an increase in professional fees, relating to a corporate litigation matter, of approximately $2,300,000 during the fiscal year ended September 30, 2019. This litigation has been resolved with a settlement being reached on February 11, 2019. The Company does not anticipate further professional fees relating to this litigation. Additionally, as part of this settlement, the Company recorded consulting and separation fees of $800,000 during the fiscal year ended September 30, 2019. The Company also recorded a one-time pension expense related to its deferred retirement benefit plan of approximately $965,000 in fiscal year 2019. Partially offsetting these increases were decreases in expenses relating to (i) a reduction in stock compensation expense of $823,000 as a result of a former senior executive forfeiting his stock options as part of the settled litigation, (ii) a reduction in rent expense of approximately $450,000 as a result of the Company not renewing its lease for office space in New York City, (iii) an acceleration of stock compensation expense in fiscal year 2018 of approximately $782,000 as a result of two senior executives forfeiting a portion of their stock options, and (iv) a reduction in payroll costs of approximately $1,261,000. The reduction in payroll costs was primarily from (i) a reduction in separation expenses of approximately $388,000; (ii) a reduction in accrual for paid-time-off of approximately $100,000; and (iii) a reduction in executive compensation expense of approximately $725,000 relating to the resignation of a former senior executive.
The slight increase in general and administrative expenses in fiscal year 2018, as compared to the same period in fiscal year 2017, primarily relates to increases in (i) bonus awards provided to senior executives and managers, (ii) an acceleration of stock compensation expense as a result of two senior executives forfeiting a portion of their stock options, (iii) costs related to the Tender Offer which commenced in September 2018 and (iv) an increase in rent, which commenced October 30, 2017, as a result of the Company selling its office building in Fort Myers, FL, and leasing back a portion of the space. These items resulted in an aggregate increase in general and administrative expenses of approximately $2,700,000. These increases were offset by decreases primarily attributable to salary and stock compensation expenses incurred with respect to employment agreements executed for new executives in the fiscal year 2017 which did not occur in the fiscal year 2018, a reduction of expenses incurred relating to separation and consulting arrangements, as well as a reduction in bad debt expense and recruiting fees.
Other (Expense) Income
Other income for the fiscal years ended September 30, 2019 and 2018 was approximately $5,019,000 and approximately $2,665,000, respectively. The increase in other income was primarily due to the Company recording a higher gain on sale of real estate, property
32
and equipment and assets held for sale in fiscal year 2019, as compared to fiscal year 2018. In fiscal year 2019, the Company recorded a gain of approximately $13,166,000, which was generated primarily for the sale of land on its West Ranch in September 2019. For the fiscal year ended September 30, 2018, the Company recorded a gain of $11,041,000 on the sale of real estate, property and equipment and assets held for sale, which included its corporate office building in Fort Myers, Florida, its Gal Hog property and a land parcel within its East Ranch resulting in gains of approximately $1,751,000, $6,709,000 and $1,759,000, respectively. Additionally, the Company incurred less interest expense of approximately $1,400,000 in fiscal year 2019, as compared to fiscal year 2018, primarily due to the Company recording imputed interest expense during the fiscal year ended September 30, 2018 relating to its Sugarcane transaction, which was terminated in fiscal year 2019.
Other income (expense), net, for the fiscal year ended September 30, 2018 and 2017 was approximately $2,655,000 and approximately $(7,248,000), respectively. The shift from other expense, net to other income, net is primarily due to recording a higher gain on sale of real estate, property and equipment and assets held for sale. For the fiscal year ended September 30, 2018, the Company sold certain properties and equipment which included its corporate office building in Fort Myers, Florida, its Gal Hog property and a land parcel within its East Ranch resulting in gains of approximately $1,751,000, $6,709,000 and $1,759,000, respectively. During the fiscal year ended September 30, 2017, the Company sold land and facilities in Hendry County, Florida, which resulted in a gain of approximately $1,371,000. Additionally, the Company incurred less interest expense of approximately $580,000 due to the continued pay-down of its long-term debt, as well as a prepayment made on a loan of approximately $4,453,000 with the proceeds from the asset sales.
Income Taxes
For the fiscal years ended September 30, 2019, 2018 and 2017, the provision (benefit) for income taxes was approximately $12,783,000, $390,000 and $(3,846,000), respectively, and the related effective income tax rates were approximately 25.45%, 2.96% and 28.83%, respectively. The change in the tax provision for the fiscal year ended September 30, 2019 is the result of the Company generating greater net income during the current fiscal year as compared to the prior fiscal year. Additionally, a one-time non-cash deferred income tax benefit of approximately $9,847,000 was recorded in fiscal year 2018 which resulted from the remeasurement of the Company's net deferred tax liabilities due to the 21% corporate tax rate that was enacted December 22, 2017, and the expiration of its capital loss carryforward, which expired at September 30, 2018, of approximately $5,634,000 was recorded in fiscal year 2018, resulting in an additional income tax expense.
The change in the provision for income taxes for the fiscal year ended September 30, 2018, as compared to fiscal year 2017, primarily resulted from (i) the Company generating net income, (ii) a one-time non-cash deferred income tax benefit of approximately $9,847,000 resulting from the remeasurement of the Company's net deferred tax liabilities due to the 21% corporate tax rate that was enacted December 22, 2017, and (iii) the expiration of its capital loss carryforward, which expired at September 30, 2018, of approximately $5,634,000, resulting in an additional income tax expense.
Seasonality
The Company is 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 Alico's fiscal year produce the majority of the Company's 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.
33
Liquidity and Capital Resources
A comparative balance sheet summary is presented in the following table:
(in thousands) | September 30, | ||||||||||
2019 | 2018 | Change | |||||||||
Cash and cash equivalents and restricted cash | $ | 23,838 | $ | 32,260 | $ | (8,422 | ) | ||||
Total current assets | $ | 61,977 | $ | 71,061 | $ | (9,084 | ) | ||||
Total current liabilities | $ | 28,951 | $ | 21,476 | $ | 7,475 | |||||
Working capital | $ | 33,026 | $ | 49,585 | $ | (16,559 | ) | ||||
Total assets | $ | 417,388 | $ | 423,422 | $ | (6,034 | ) | ||||
Principal amount of term loans and lines of credit | $ | 163,449 | $ | 177,034 | $ | (13,585 | ) | ||||
Current ratio | 2.14 to 1 | 3.31 to 1 | |||||||||
Alico's business has historically generated positive net cash flows from operating activities. Sources of cash primarily include cash flows from operations, sales of under-performing land and other assets, amounts available under the Company's 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, Alico 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 the Company will continue to have access to the capital markets on acceptable terms, or at all.
The principal uses of cash that affect Alico's 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, and debt service costs including interest and principal payments on term loans and other credit facilities.
Management believes that a combination of cash-on-hand, cash generated from operations, asset sales and availability under the Company's lines of credit will provide sufficient liquidity to service the principal and interest payments on its indebtedness, and will satisfy working capital requirements and capital expenditures for at least the next twelve months and over the long term. Alico has a $70,000,000 working capital line of credit, of which approximately $69,540,000 is available for general use as of September 30, 2019, and a $25,000,000 revolving line of credit, all of which is available for general use as of September 30, 2019 (see Note 6. “Long-Term Debt and Lines of Credit" to the accompanying Consolidated Financial Statements). If the Company pursues significant growth and other corporate opportunities, it could have a material adverse impact on its cash balances, and may need to finance such activities by drawing down monies under its lines of credit or by obtaining additional debt or equity financing. There can be no assurance that additional financing will be available to the Company when needed or, if available, that it can be obtained on commercially reasonable terms. Any inability to obtain additional financing could impact Alico's ability to pursue different growth and other corporate opportunities.
The level of debt could have important consequences on Alico's business, including, but not limited to, increasing its 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.
Cash Management Impacts
Cash and cash equivalents and restricted cash decreased from approximately $32,260,000 as of September 30, 2018 to approximately $23,838,000 as of September 30, 2019. Cash and cash equivalents and restricted cash increased by approximately $28,865,000 as of September 30, 2018, as compared to September 30, 2017. The components of these changes are discussed below.
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Consolidated Statements of Cash Flows
The following table details the items contributing to the changes in cash and cash equivalents and restricted cash for fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands) | Fiscal Year Ended September 30, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Net cash provided by operating activities | $ | 48,832 | $ | 18,578 | $ | 27,481 | |||||
Net cash (used in) provided by investing activities | (4,960 | ) | 22,924 | (9,337 | ) | ||||||
Net cash used in financing activities | (52,294 | ) | (12,637 | ) | (21,374 | ) | |||||
Net (decrease) increase in cash and cash equivalents and restricted cash | $ | (8,422 | ) | $ | 28,865 | $ | (3,230 | ) | |||
Net Cash Provided By Operating Activities
The following table details the items contributing to Net Cash Provided By Operating Activities for the fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands) | Fiscal Year Ended September 30, | Fiscal Year Ended September 30, | |||||||||||||||||||||
2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Net income (loss) | $ | 37,450 | $ | 12,800 | $ | 24,650 | $ | 12,800 | $ | (9,496 | ) | $ | 22,296 | ||||||||||
Deferred gain on sale of sugarcane land | — | (967 | ) | 967 | (967 | ) | (538 | ) | (429 | ) | |||||||||||||
Depreciation, depletion and amortization | 13,924 | 13,756 | 168 | 13,756 | 15,226 | (1,470 | ) | ||||||||||||||||
Loss on breeding herd sales | — | 13 | (13 | ) | 13 | 337 | (324 | ) | |||||||||||||||
Deferred income tax expense (benefit) | 3,267 | (1,955 | ) | 5,222 | (1,955 | ) | (3,948 | ) | 1,993 | ||||||||||||||
Cash surrender value | 11 | (27 | ) | 38 | (27 | ) | (15 | ) | (12 | ) | |||||||||||||
Deferred retirement benefits | 829 | (41 | ) | 870 | (41 | ) | (102 | ) | 61 | ||||||||||||||
Magnolia Fund undistributed loss (earnings) | — | (8 | ) | 8 | (8 | ) | 202 | (210 | ) | ||||||||||||||
Gain on sale of real estate, property and equipment and assets held for sale | (13,166 | ) | (10,281 | ) | (2,885 | ) | (10,281 | ) | (1,373 | ) | (8,908 | ) | |||||||||||
Inventory net realizable value adjustment | 808 | 1,115 | (307 | ) | 1,115 | 1,199 | (84 | ) | |||||||||||||||
Inventory casualty loss | — | — | — | — | 13,489 | (13,489 | ) | ||||||||||||||||
Loss on disposal of property and equipment | — | 207 | (207 | ) | 207 | — | 207 | ||||||||||||||||
Change in fair value of derivatives | 989 | — | 989 | — | — | — | |||||||||||||||||
Impairment of long-lived assets | 396 | 2,234 | (1,838 | ) | 2,234 | 9,346 | (7,112 | ) | |||||||||||||||
Non-cash interest expense on deferred gain on sugarcane land | — | 1,361 | (1,361 | ) | 1,361 | 1,413 | (52 | ) | |||||||||||||||
Insurance proceeds received for damage to property and equipment | (486 | ) | (477 | ) | (9 | ) | (477 | ) | — | (477 | ) | ||||||||||||
Bad debt expense | — | 24 | (24 | ) | 24 | 312 | (288 | ) | |||||||||||||||
Stock-based compensation expense | 824 | 2,613 | (1,789 | ) | 2,613 | 1,653 | 960 | ||||||||||||||||
Change in working capital | 3,986 | (1,789 | ) | 5,775 | (1,789 | ) | (224 | ) | (1,565 | ) | |||||||||||||
Net cash provided by operating activities | $ | 48,832 | $ | 18,578 | $ | 30,254 | $ | 18,578 | $ | 27,481 | $ | (8,903 | ) | ||||||||||
The increase in net cash provided by operating activities for the fiscal year ended September 30, 2019, as compared to the same period in fiscal year 2018, was primarily due to (i) an increase in net income which was primarily driven by increased citrus sales and the receipt of federal disaster relief funds relating to Hurricane Irma, and (ii) an increase in working capital, which is due to a decrease in accounts receivable and an increase in income taxes payable.
The decrease in net cash provided by operating activities for the fiscal year ended September 30, 2018, as compared to the same period in the fiscal year 2017, was primarily due to the effect of the Company recognizing a greater gain on the sale of real estate,
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property and equipment and assets held for sale as a result of the Company’s decision to divest itself from several non-core and underperforming assets during the fiscal year 2018. Additionally, the Company experienced a decrease in working capital as compared to the previous fiscal year. This is primarily the result of the Company having a smaller increase in accounts receivable due to lower revenues earned, and experiencing a smaller decrease in inventory levels due the Company taking an impairment on its inventory levels at September 30, 2017, which directly impacted the change for the fiscal year ended September 30, 2018. This decrease was partially offset by an increase in net income.
Due to the seasonal nature of Alico's business, working capital requirements are typically greater in the first and fourth quarters of its fiscal year. Cash flows from operating activities typically improve in the second and third fiscal quarters, as sales of its harvested citrus are made.
Net Cash (Used In) Provided By Investing Activities
The following table details the items contributing to Net Cash (Used In) Provided By Investing Activities for the fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands) | Fiscal Year Ended September 30, | Fiscal Year Ended September 30, | |||||||||||||||||||||
2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Purchases of property and equipment | (20,000 | ) | (16,352 | ) | (3,648 | ) | (16,352 | ) | (13,353 | ) | (2,999 | ) | |||||||||||
Return on investment in Magnolia Fund | — | 25 | (25 | ) | 25 | 324 | (299 | ) | |||||||||||||||
Net proceeds from sale of property and equipment and assets held for sale | 14,602 | 37,969 | (23,367 | ) | 37,969 | 760 | 37,209 | ||||||||||||||||
Net proceeds from sale of real estate | — | 1,811 | (1,811 | ) | 1,811 | 2,184 | (373 | ) | |||||||||||||||
Insurance proceeds received for damage to property and equipment | 486 | 477 | 9 | 477 | — | 477 | |||||||||||||||||
Change in deposits on purchase of citrus trees | (108 | ) | (431 | ) | 323 | (431 | ) | 748 | (1,179 | ) | |||||||||||||
Advances on notes receivables, net | 60 | (575 | ) | 635 | (575 | ) | — | (575 | ) | ||||||||||||||
Net cash (used in) provided by investing activities | $ | (4,960 | ) | $ | 22,924 | $ | (27,884 | ) | $ | 22,924 | $ | (9,337 | ) | $ | 32,261 | ||||||||
The change from net cash provided by investing activities for the fiscal year ended September 30, 2018 to net cash used in investing activities for the fiscal year ended September 30, 2019 was primarily due to a decrease in proceeds received on the sale of certain assets sold during fiscal year 2019, as compared to fiscal year 2018. This is due to the Company divesting of several more assets in fiscal year 2018, as compared to fiscal year 2019 (see Note 4. “Assets Held for Sale” and Note 5. “Property & Equipment, Net” to the accompanying Consolidated Financial Statements). In addition, the shift, to a smaller extent, was due to an increase in capital expenditures which was driven by the purchase of certain land blocks within its existing grove location.
The increase in net cash provided by (used in) investing activities for the fiscal year ended September 30, 2018, as compared to the fiscal year ended September 30, 2017, was primarily due to proceeds received from the sale of certain assets during the fiscal year 2018. This increase was partially offset by greater capital expenditures in the fiscal year 2018, as compared to the same period in the prior fiscal year, as a result of the Company’s decision to plant more trees.
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Net Cash Used In Financing Activities
The following table details the items contributing to Net Cash Used In Financing Activities for the fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands) | Fiscal Year Ended September 30, | Fiscal Year Ended September 30, | |||||||||||||||||||||
2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||
Repayments on revolving lines of credit | $ | (89,231 | ) | $ | (25,600 | ) | $ | (63,631 | ) | $ | (25,600 | ) | $ | (70,770 | ) | $ | 45,170 | ||||||
Borrowings on revolving lines of credit | 86,546 | 28,285 | 58,261 | 28,285 | 65,770 | (37,485 | ) | ||||||||||||||||
Principal payments on term loans | (10,900 | ) | (12,127 | ) | 1,227 | (12,127 | ) | (10,743 | ) | (1,384 | ) | ||||||||||||
Treasury stock purchases | (25,576 | ) | (2,215 | ) | (23,361 | ) | (2,215 | ) | (3,064 | ) | 849 | ||||||||||||
Payment on termination of sugarcane agreement | (11,300 | ) | — | (11,300 | ) | — | — | — | |||||||||||||||
Dividends paid | (1,833 | ) | (1,972 | ) | 139 | (1,972 | ) | (1,987 | ) | 15 | |||||||||||||
Capital contribution received from noncontrolling interest | — | 1,000 | (1,000 | ) | 1,000 | — | 1,000 | ||||||||||||||||
Capital lease obligation payments | — | (8 | ) | 8 | (8 | ) | (580 | ) | 572 | ||||||||||||||
Net cash used in financing activities | $ | (52,294 | ) | $ | (12,637 | ) | $ | (39,657 | ) | $ | (12,637 | ) | $ | (21,374 | ) | $ | 8,737 | ||||||
The increase in net cash used in financing activities for the fiscal year ended September 30, 2019, as compared to the fiscal year ended September 30, 2018, was primarily due to the Company purchasing 752,234 common shares through a tender offer, for an aggregate amount of approximately $25,576,000, terminating its 2014 Post-Closing Agreement relating to sugarcane transaction pursuant to which the Company paid approximately $11,300,000, and paying down, net of borrowings, of its revolving line of credit by approximately $2,265,000.
The decrease in net cash used in financing activities for the fiscal year ended September 30, 2018, as compared to the fiscal year ended September 30, 2017, was primarily due to decreased repayments on the revolving line of credit, which was partially offset by less borrowings being made on the revolving lines of credit. Additionally, greater principal payments were made on the term loans of approximately $4,453,000 from a portion of the proceeds from the sale of assets, which was offset by the Company electing not to make its scheduled principal payment on certain other term loans for the first and second quarter of fiscal year 2018 of approximately $3,100,000, as it utilized its prepayment to satisfy its payment requirement.
Alico had no amount outstanding on its revolving lines of credit as of September 30, 2019.
The WCLC line of credit agreement provides for Rabo Agrifinance, Inc. to issue up to $2,000,000 in letters of credit on the Company’s behalf. As of September 30, 2019, there was approximately $460,000 in outstanding letters of credit, which correspondingly slightly reduced Alico's availability under the line of credit.
Off Balance Sheet Arrangements
None
Contractual Obligations
Alico has various contractual obligations which are fixed and determinable. The following table presents the Company's significant contractual obligations and commercial commitments on an undiscounted basis as of September 30, 2019 and the future periods in which such obligations are expected to be settled in cash.
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(in thousands) | |||||||||||||||
Payments Due by Period | |||||||||||||||
Total | <1 Year | 1-3 Years | 3-5 Years | 5+ Years | |||||||||||
Long-Term Debt | $ | 163,449 | $ | 5,338 | $ | 25,745 | $ | 21,510 | $ | 110,856 | |||||
Interest on Long-Term Debt | 48,117 | 6,764 | 12,120 | 10,188 | 19,045 | ||||||||||
Retirement Benefits | 5,876 | 5,876 | — | — | — | ||||||||||
Consulting/Non-Compete Agreement | 546 | 400 | 146 | — | — | ||||||||||
Operating Leases | 550 | 191 | 344 | 15 | — | ||||||||||
Tree Purchase Commitments | 1,603 | 1,603 | — | — | — | ||||||||||
Total | $ | 220,141 | $ | 20,172 | $ | 38,355 | $ | 31,713 | $ | 129,901 | |||||
Purchase Commitments
The Company enters into contracts for the purchase of citrus trees during the normal course of its business. As of September 30, 2019, the Company had approximately $1,603,000 relating to outstanding commitments for these purchases, which will be paid upon delivery.
Impact of Inflation and Changing Prices
Our financial statements included in this Annual Report on Form 10-K have been prepared in accordance with U.S. GAAP, which requires us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession generally are not considered. The primary effect of inflation on our operations is reflected in increased operating costs. In our management’s opinion, changes in interest rates affect the financial condition to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.
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Critical Accounting Policies
Alico's Consolidated Financial Statements are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in those financial statements and accompanying notes. Management considers an accounting policy to be critical if it is important to the Company's financial condition and results of operations and if it requires significant judgment and estimates on the part of management in its application. Alico considers policies relating to the following matters to be critical accounting policies:
Revenue Recognition
The Company recognizes revenue at the amount it expects to be entitled to be paid, determined when control of the products or services is transferred to its customers, which occurs upon delivery of and acceptance of the fruit by the customer and the Company has a right to payment. The Company recognized revenues from cattle sales at the time the cattle were delivered. Management reviews the reasonableness of the revenue accruals quarterly based on buyers’ and processors’ advances to growers, cash and futures markets and experience in the industry. Adjustments are made throughout the fiscal year to these estimates as more current relevant industry information becomes available. Differences between the estimates and the final realization of revenues can be significant and can be either positive or negative. During the periods presented in this Annual Report on Form 10-K, no material adjustments were made to the reported revenues from our crops.
Alico Fruit Company ("AFC") operations primarily consist of providing supply chain management services to Alico, as well as to other citrus growers in the state of Florida. AFC also purchases and resells citrus fruit; in these transactions, AFC (i) acts as a principal; (ii) takes title to the products; and (iii) has the risks and rewards of ownership, including the risk of loss for collection, delivery or returns. Therefore, AFC recognizes revenues based on the gross amounts due from customers for its marketing activities. Supply chain management service revenues are recognized when the services are performed.
Inventories
The costs of growing crops, including but not limited to labor, fertilization, fuel, crop nutrition and irrigation, are capitalized into inventory throughout the respective crop year. Such costs are expensed as cost of sales when the crops are harvested and are recorded as operating expenses in the Consolidated Statements of Operations. Inventories are stated at the lower of cost or net realizable value. The cost for unharvested citrus crops is based on accumulated production costs incurred during the period from January 1 through the balance sheet date.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Major improvements are capitalized while maintenance and repairs are expensed in the period the cost is incurred. Costs related to the development of citrus groves, through planting of trees, are capitalized. Such costs include land clearing, excavation and construction of ditches, dikes, roads and reservoirs among other costs. After the planting, caretaking costs or pre-productive maintenance costs are capitalized for four years. After four years, a grove is considered to have reached maturity and the accumulated costs are depreciated over 25 years, except for land clearing and excavation, which are considered costs of land and not depreciated.
The breeding herd consisted of purchased animals and animals raised on the Company’s ranches. Purchased animals were stated at the cost of acquisition. The cost of animals raised on the Ranch was based on the accumulated cost of developing such animals for productive use. The breeding herd was sold in January 2018.
Income Taxes
The Company uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statements and the income tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income or loss in the period that includes the enactment date. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on the Company’s income tax provision and net income or loss in the period the determination is made. For the fiscal years ended September 30, 2019, 2018 and 2017, the Company recorded valuation allowances of $0, $5,634,000 and $0, respectively, relating to the unutilized capital
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loss carryforwards which expired. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs. The Company records interest related to unrecognized tax benefits in income tax expense.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company records impairment losses on long-lived assets used in operations, other than goodwill, when events and circumstances indicate that the asset or asset group might be impaired and the estimated cash flows (undiscounted and without interest charges) to be generated by those assets or asset group over the remaining lives of the assets are less than the carrying amounts of those assets. In calculating impairments and the estimated cash flows, the Company assigns its asset groups by determining the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of the other Company assets. The net carrying values of assets or asset groups not recoverable are reduced to their fair values. Our cash flow estimates are based on historical results adjusted to reflect our best estimates of future market conditions and operating conditions. As of September 30, 2019 and 2018, long-lived assets were comprised of property and equipment.
Fair Value Measurements
The carrying amounts in the balance sheets for operating accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short term maturity of these items. The carrying amounts reported for our long-term debt approximates fair value as our borrowings with commercial lenders are at interest rates that vary with market conditions and fixed rates that approximate market rates for comparable loans.
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:
Level 1- Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2- Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.
Level 3- Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.
Impact of Accounting Pronouncements
See Item 8. "Financial Statements and Supplemental Data" - Note 1. "Description of Business and Basis of Presentation" for additional information about the impact of accounting pronouncements.
Subsequent Events
On November 14, 2019, 734 Investors filed a Form 4 and an amendment to Schedule 13D with the SEC disclosing that on November 12, 2019, it distributed all of its shares of Company common stock previously held by it, consisting of 3,173,405 shares, on a pro rata basis, to its members. Prior to such distribution, 734 Investors was the Company’s largest shareholder.
On December 5, 2019, the Board of Directors of the Company declared a first quarter of fiscal year 2020 cash dividend of $0.09 per share on its outstanding common stock to be paid to shareholders of record as of December 27, 2019, with payment expected on January 10, 2020.
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Compensatory Arrangements of Certain Officers.
On December 2, 2019, the Company entered into a new employment agreement (the “Rallo Employment Agreement”) with Richard Rallo. Mr. Rallo serves as Chief Financial Officer of the Company. The Rallo Employment Agreement provides for an annual base salary of $275,000. Mr. Rallo is eligible for an annual incentive compensation award with an annual target opportunity in an amount equal to 40% of his annual base salary.
The Rallo Employment Agreement also provides that, if Mr. Rallo’s employment is terminated by the Company without “cause” or Mr. Rallo resigns with “good reason” (as each such term is defined in the Rallo Employment Agreement), then, subject to his execution, delivery, and non-revocation of a general release of claims in favor of the Company, Mr. Rallo will be entitled to (i) cash severance in an amount equal to 12 months of the annual base salary, (ii) the Accrued Obligations (as defined in the Rallo Employment Agreement) in a cash lump sum within 30 days after the date of termination, (iii) any rights or payments that are vested benefits or that Mr. Rallo is otherwise entitled to receive at or subsequent to the date of termination under any employee benefit plan or any other contract or agreement with the Company, and (iv) any Annual Bonus (as defined in the Rallo Employment Agreement) that has been earned but not paid as of the date of termination.
The Rallo Employment Agreement includes various restrictive covenants in favor of the Company, including a confidentiality covenant, a non-disparagement covenant, and 12-month post-termination noncompetition and customer and employee non-solicitation covenants.
In addition to his position as Chief Financial Officer, Mr. Rallo retains his position as the Company’s Principal Accounting Officer.
The foregoing description of the Rallo Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Rallo Employment agreement, which is attached hereto as Exhibit 10.37 to this Annual Report on Form 10-K and is incorporated herein by reference.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk - Market risk represents the potential loss resulting from adverse changes in the value of financial instruments, either derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates, commodity prices, and equity security prices. The Company handles market risks in accordance with its established policies; however, Alico does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company does consider, on occasion, the need to enter into financial instruments to manage and reduce the impact of changes in interest rates; however, the Company entered into no such instruments during the three-year period ended September 30, 2019. The Company held various financial instruments as of September 30, 2019 and 2018, consisting of financial assets and liabilities reported in the Company’s Consolidated Balance Sheets and off-balance sheet exposures resulting from letters of credit issued for the benefit of Alico.
Interest Rate Risk - The Company is subject to interest rate risk from the utilization of financial instruments such as term loan debt and other borrowings. The Company’s primary long-term obligations are fixed rate debts subject to fair value risk due to interest rate fluctuations. The Company believes that the carrying value of our long-term debt approximates fair value given the stability of market interest rates.
The Company is also subject to interest rate risk on its variable rate debt. A one-percentage-point increase in prevailing interest rates would have increased interest expense on our variable rate debt obligations by approximately $3,475,000 for the fiscal year ended September 30, 2019.
Foreign-Exchange Rate Risk - The Company currently has no exposure to foreign-exchange rate risk because all of its financial transactions are denominated in U.S. dollars.
Commodity Price Risk - The Company has no financial instruments subject to commodity price risk.
Equity Security Price Risk - None of the Company’s financial instruments have potential exposure to equity security price risk.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page | |
Consolidated Financial Statements: | |
All schedules are omitted for the reason that they are not applicable or the required information is included in the financial statements or notes. | |
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Alico, Inc.
Opinions on the Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Alico, Inc. and subsidiaries (the Company) as of September 30, 2019 and 2018, and the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended September 30, 2019, and the related notes (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinions
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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/s/ RSM US LLP
We have served as the Company's auditor since 2007.
Orlando, Florida
December 5, 2019
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ALICO, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 18,630 | $ | 25,260 | ||||
Accounts receivable, net | 713 | 2,544 | ||||||
Inventories | 40,143 | 41,033 | ||||||
Assets held for sale | 1,442 | 1,391 | ||||||
Prepaid expenses and other current assets | 1,049 | 833 | ||||||
Total current assets | 61,977 | 71,061 | ||||||
Restricted cash | 5,208 | 7,000 | ||||||
Property and equipment, net | 345,648 | 340,403 | ||||||
Goodwill | 2,246 | 2,246 | ||||||
Other non-current assets | 2,309 | 2,712 | ||||||
Total assets | $ | 417,388 | $ | 423,422 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 4,163 | $ | 3,764 | ||||
Accrued liabilities | 7,769 | 8,881 | ||||||
Long-term debt, current portion | 5,338 | 5,275 | ||||||
Deferred retirement obligations, current portion | 5,226 | 345 | ||||||
Income taxes payable | 5,536 | 2,320 | ||||||
Other current liabilities | 919 | 891 | ||||||
Total current liabilities | 28,951 | 21,476 | ||||||
Long-term debt: | ||||||||
Principal amount, net of current portion | 158,111 | 169,074 | ||||||
Less: deferred financing costs, net | (1,369 | ) | (1,563 | ) | ||||
Long-term debt less current portion and deferred financing costs, net | 156,742 | 167,511 | ||||||
Lines of credit | — | 2,685 | ||||||
Deferred income tax liabilities, net | 32,125 | 25,153 | ||||||
Deferred gain on sale | — | 24,928 | ||||||
Deferred retirement obligations | — | 4,052 | ||||||
Other liabilities | 172 | 22 | ||||||
Total liabilities | 217,990 | 245,827 | ||||||
Commitments and Contingencies (Note 16) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, no par value, 1,000,000 shares authorized; none issued | — | — | ||||||
Common stock, $1.00 par value, 15,000,000 shares authorized; 8,416,145 shares issued and 7,476,513 and 8,199,957 shares outstanding at September 30, 2019 and September 30, 2018, respectively | 8,416 | 8,416 | ||||||
Additional paid in capital | 19,781 | 20,126 | ||||||
Treasury stock, at cost, 939,632 and 216,188 shares held at September 30, 2019 and September 30, 2018, respectively | (31,943 | ) | (7,536 | ) | ||||
Retained earnings | 198,049 | 151,111 | ||||||
Total Alico stockholders' equity | 194,303 | 172,117 | ||||||
Noncontrolling interest | 5,095 | 5,478 | ||||||
Total stockholders' equity | 199,398 | 177,595 | ||||||
Total liabilities and stockholders' equity | $ | 417,388 | $ | 423,422 | ||||
See accompanying notes to the consolidated financial statements.
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ALICO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) | |||||||||||
Fiscal Year Ended September 30, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Operating revenues: | |||||||||||
Alico Citrus | $ | 119,031 | $ | 78,121 | $ | 123,441 | |||||
Water Resources and Other Operations | 3,220 | 3,160 | 6,388 | ||||||||
Total operating revenues | 122,251 | 81,281 | 129,829 | ||||||||
Operating expenses: | |||||||||||
Alico Citrus | 59,594 | 51,709 | 111,947 | ||||||||
Water Resources and Other Operations | 2,297 | 3,979 | 8,952 | ||||||||
Total operating expenses | 61,891 | 55,688 | 120,899 | ||||||||
Gross profit | 60,360 | 25,593 | 8,930 | ||||||||
General and administrative expenses | 15,146 | 15,058 | 15,024 | ||||||||
Income (loss) from operations | 45,214 | 10,535 | (6,094 | ) | |||||||
Other income (expense): | |||||||||||
Investment and interest income (loss), net | 49 | 39 | (148 | ) | |||||||
Interest expense | (7,180 | ) | (8,561 | ) | (9,141 | ) | |||||
Gain on sale of real estate, property and equipment and assets held for sale | 13,166 | 11,041 | 2,181 | ||||||||
Change in fair value of derivatives | (989 | ) | — | — | |||||||
Other (loss) income, net | (27 | ) | 136 | (140 | ) | ||||||
Total other income (expense) | 5,019 | 2,655 | (7,248 | ) | |||||||
Income (loss) before income taxes | 50,233 | 13,190 | (13,342 | ) | |||||||
Income tax provision (benefit) | 12,783 | 390 | (3,846 | ) | |||||||
Net income (loss) | 37,450 | 12,800 | (9,496 | ) | |||||||
Net loss attributable to noncontrolling interests | 383 | 250 | 45 | ||||||||
Net income (loss) attributable to Alico, Inc. common stockholders | $ | 37,833 | $ | 13,050 | $ | (9,451 | ) | ||||
Per share information attributable to Alico, Inc. common stockholders: | |||||||||||
Earnings (loss) per common share: | |||||||||||
Basic | $ | 5.06 | $ | 1.59 | $ | (1.14 | ) | ||||
Diluted | $ | 5.05 | $ | 1.57 | $ | (1.14 | ) | ||||
Weighted-average number of common shares outstanding: | |||||||||||
Basic | 7,472 | 8,232 | 8,300 | ||||||||
Diluted | 7,493 | 8,301 | 8,300 | ||||||||
Cash dividends declared per common share | $ | 0.24 | $ | 0.24 | $ | 0.24 | |||||
See accompanying notes to the consolidated financial statements.
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ALICO, INC. | |||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | |||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||
Common stock | Additional Paid-In | Treasury | Retained | Total Alico, Inc. | Non-controlling | Total | |||||||||||||||||||||||
Shares | Amount | Capital | Stock | Earnings | Equity | Interest | Equity | ||||||||||||||||||||||
Balance at September 30, 2016 | 8,416 | $ | 8,416 | $ | 18,155 | $ | (4,585 | ) | $ | 151,504 | $ | 173,490 | $ | 4,773 | $ | 178,263 | |||||||||||||
Net loss | — | — | — | — | (9,451 | ) | (9,451 | ) | (45 | ) | (9,496 | ) | |||||||||||||||||
Dividends | — | — | — | — | (1,987 | ) | (1,987 | ) | — | (1,987 | ) | ||||||||||||||||||
Treasury stock purchases | — | — | — | (3,064 | ) | — | (3,064 | ) | — | (3,064 | ) | ||||||||||||||||||
Stock-based compensation: | |||||||||||||||||||||||||||||
Directors | — | — | (374 | ) | 1,147 | — | 773 | — | 773 | ||||||||||||||||||||
Executives | — | — | 880 | — | — | 880 | — | 880 | |||||||||||||||||||||
Other | — | — | 33 | — | (33 | ) | — | — | — | ||||||||||||||||||||
Balance at September 30, 2017 | 8,416 | 8,416 | 18,694 | (6,502 | ) | 140,033 | 160,641 | 4,728 | 165,369 | ||||||||||||||||||||
Net income (loss) | — | — | — | — | 13,050 | 13,050 | (250 | ) | 12,800 | ||||||||||||||||||||
Dividends | — | — | — | — | (1,972 | ) | (1,972 | ) | — | (1,972 | ) | ||||||||||||||||||
Treasury stock purchases | — | — | — | (2,215 | ) | — | (2,215 | ) | — | (2,215 | ) | ||||||||||||||||||
Capital contribution received from noncontrolling interest funding | — | — | — | — | — | — | 1,000 | 1,000 | |||||||||||||||||||||
Stock-based compensation: | |||||||||||||||||||||||||||||
Directors | — | — | (322 | ) | 1,181 | — | 859 | — | 859 | ||||||||||||||||||||
Executives | — | — | 1,754 | — | — | 1,754 | — | 1,754 | |||||||||||||||||||||
Balance at September 30, 2018 | 8,416 | 8,416 | 20,126 | (7,536 | ) | 151,111 | 172,117 | 5,478 | 177,595 | ||||||||||||||||||||
Net income (loss) | — | — | — | — | 37,833 | 37,833 | (383 | ) | 37,450 | ||||||||||||||||||||
Dividends | — | — | — | — | (1,792 | ) | (1,792 | ) | — | (1,792 | ) | ||||||||||||||||||
Treasury stock purchases | — | — | — | (25,576 | ) | — | (25,576 | ) | — | (25,576 | ) | ||||||||||||||||||
ASC 610-20 adoption | — | — | — | — | 10,897 | 10,897 | — | 10,897 | |||||||||||||||||||||
Stock-based compensation: | |||||||||||||||||||||||||||||
Directors | — | — | (300 | ) | 1,169 | — | 869 | — | 869 | ||||||||||||||||||||
Executives | — | — | 778 | — | — | 778 | — | 778 | |||||||||||||||||||||
Executive forfeiture | — | — | (823 | ) | — | — | (823 | ) | — | (823 | ) | ||||||||||||||||||
Balance at September 30, 2019 | 8,416 | $ | 8,416 | $ | 19,781 | $ | (31,943 | ) | $ | 198,049 | $ | 194,303 | $ | 5,095 | $ | 199,398 | |||||||||||||
See accompanying notes to the consolidated financial statements.
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ALICO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) | ||||||||||||
Fiscal Year Ended September 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net cash provided by operating activities: | ||||||||||||
Net income (loss) | $ | 37,450 | $ | 12,800 | $ | (9,496 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Deferred gain on sale of sugarcane land | — | (967 | ) | (538 | ) | |||||||
Depreciation, depletion and amortization | 13,924 | 13,756 | 15,226 | |||||||||
Loss on breeding herd sales | — | 13 | 337 | |||||||||
Deferred income tax expense (benefit) | 3,267 | (1,955 | ) | (3,948 | ) | |||||||
Cash surrender value | 11 | (27 | ) | (15 | ) | |||||||
Deferred retirement benefits | 829 | (41 | ) | (102 | ) | |||||||
Magnolia Fund undistributed loss (earnings) | — | (8 | ) | 202 | ||||||||
Gain on sale of real estate, property and equipment and assets held for sale | (13,166 | ) | (10,281 | ) | (1,373 | ) | ||||||
Inventory casualty loss | — | — | 13,489 | |||||||||
Inventory net realizable value adjustment | 808 | 1,115 | 1,199 | |||||||||
Loss on disposal of property and equipment | — | 207 | — | |||||||||
Change in fair value of derivatives | 989 | — | — | |||||||||
Impairment of long-lived assets | 396 | 2,234 | 9,346 | |||||||||
Non-cash interest expense on deferred gain on sugarcane land | — | 1,361 | 1,413 | |||||||||
Insurance proceeds received for damage to property and equipment | (486 | ) | (477 | ) | — | |||||||
Bad debt expense | — | 24 | 312 | |||||||||
Stock-based compensation expense | 824 | 2,613 | 1,653 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 1,531 | 1,718 | 142 | |||||||||
Inventories | 82 | (6,554 | ) | 3,724 | ||||||||
Prepaid expenses | (211 | ) | 177 | (604 | ) | |||||||
Income tax receivable | 15 | (15 | ) | 1,013 | ||||||||
Other assets | 288 | 23 | (415 | ) | ||||||||
Accounts payable and accrued liabilities | (1,113 | ) | 2,987 | (2,895 | ) | |||||||
Income tax payable | 3,216 | 2,320 | — | |||||||||
Other liabilities | 178 | (2,445 | ) | (1,189 | ) | |||||||
Net cash provided by operating activities | 48,832 | 18,578 | 27,481 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment | (20,000 | ) | (16,352 | ) | (13,353 | ) | ||||||
Return on investment in Magnolia Fund | — | 25 | 324 | |||||||||
Net proceeds from sale of property and equipment and assets held for sale | 14,602 | 37,969 | 760 | |||||||||
Net proceeds from sale of real estate | — | 1,811 | 2,184 | |||||||||
Insurance proceeds received for damage to property and equipment | 486 | 477 | — | |||||||||
Change in deposits on purchase of citrus trees | (108 | ) | (431 | ) | 748 | |||||||
Advances on notes receivables, net | 60 | (575 | ) | — | ||||||||
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Net cash (used in) provided by investing activities | (4,960 | ) | 22,924 | (9,337 | ) | ||||||
Cash flows from financing activities: | |||||||||||
Repayments on revolving lines of credit | (89,231 | ) | (25,600 | ) | (70,770 | ) | |||||
Borrowings on revolving lines of credit | 86,546 | 28,285 | 65,770 | ||||||||
Principal payments on term loans | (10,900 | ) | (12,127 | ) | (10,743 | ) | |||||
Treasury stock purchases | (25,576 | ) | (2,215 | ) | (3,064 | ) | |||||
Payment on termination of sugarcane agreement | (11,300 | ) | — | — | |||||||
Dividends paid | (1,833 | ) | (1,972 | ) | (1,987 | ) | |||||
Capital contribution received from noncontrolling interest | — | 1,000 | — | ||||||||
Capital lease obligation payments | — | (8 | ) | (580 | ) | ||||||
Net cash used in financing activities | (52,294 | ) | (12,637 | ) | (21,374 | ) | |||||
Net (decrease) increase in cash and cash equivalents and restricted cash | (8,422 | ) | 28,865 | (3,230 | ) | ||||||
Cash and cash equivalents and restricted cash at beginning of the period | 32,260 | 3,395 | 6,625 | ||||||||
Cash and cash equivalents and restricted cash at end of the period | $ | 23,838 | $ | 32,260 | $ | 3,395 | |||||
Supplemental disclosure of cash flow information: | |||||||||||
Cash paid for interest; net of amount capitalized | $ | 6,940 | $ | 6,721 | $ | 7,240 | |||||
Cash paid (refunded) for income taxes | $ | 6,285 | $ | 25 | $ | (911 | ) | ||||
Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
Dividend declared but unpaid | $ | 449 | $ | 492 | $ | 494 | |||||
See accompanying notes to the consolidated financial statements.
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ALICO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Basis of Presentation
Description of Business
Alico, Inc., together with its subsidiaries (collectively, “Alico”, the “Company", "we", "us" or "our”), is a Florida agribusiness and land management company owning approximately 111,000 acres of land throughout Florida, including approximately 90,000 acres of mineral rights. The Company manages its land based upon its primary usage, and reviews its performance based upon two primary classifications: (i) Alico Citrus and (ii) Water Resources and Other Operations. Financial results are presented based upon its two business segments (Alico Citrus and Water Resources and Other Operations).
Basis of Presentation
The Company has prepared the accompanying financial statements on a consolidated basis. These accompanying Consolidated Financial Statements, which are referred to herein as the “Financial Statements”, have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). All significant intercompany transactions and account balances between the consolidated businesses have been eliminated.
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 the Company’s chief operating decision maker (“CODM”) in deciding how to assess performance and allocate resources. The Company’s CODM assesses performance and allocates resources based on two operating segments: (i) Alico Citrus and (ii) Water Resources and Other Operations.
Principles of Consolidation
The Financial Statements include the accounts of Alico and the accounts of all the subsidiaries in which a controlling interest is held by the Company. Under U.S. GAAP, consolidation is generally required for investments of more than 50% of the outstanding voting stock of an investee, except when control is not held by the majority owner. The Company’s subsidiaries include: Alico Land Development, Inc., Alico-Agri, Ltd., Alico Plant World, LLC, Alico Fruit Company, LLC, Alico Citrus Nursery, LLC, Alico Chemical Sales, LLC, 734 Citrus Holdings, LLC and subsidiaries, Alico Fresh Fruit, LLC, Alico Skink Mitigation, LLC and Citree Holdings 1, LLC (“Citree”). The Company considers the criteria established under FASB ASC Topic 810, “Consolidations” in its consolidation process. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the accompanying Financial Statements, the disclosure of contingent assets and liabilities in the Financial Statements and the accompanying Notes, and the reported amounts of revenues and expenses and cash flows during the periods presented. Actual results could differ from those estimates. The Company evaluates estimates on an ongoing basis. The estimates are based on current and expected economic conditions, historical experience, the experience and judgment of the Company’s management and various other specific assumptions that the Company believes to be reasonable.
Noncontrolling Interest in Consolidated Subsidiary
The Financial Statements include all assets and liabilities of the less-than-100%-owned subsidiary the Company controls, Citree. Accordingly, the Company has recorded a noncontrolling interest in the equity of such entity. Citree had net losses of approximately $781,783, $511,854 and $91,432 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively, of which $398,709, $261,046 and $46,630 was attributable to the Company for the fiscal years ended September 30, 2019, 2018, and 2017, respectively.
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Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” This guidance will require entities that enter into leases as a lessee to recognize right-of-use assets and lease liabilities for those leases classified as operating leases under previous U.S. GAAP. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. The Company anticipates recording a Right of Use Asset (“ROU”) and related liability of approximately $511,000 upon the adoption of the new standard on October 1, 2019. Additionally, the Company will record an impairment to the ROU for approximately $87,000. Topic 842 becomes effective for Alico beginning October 1, 2019.
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other” (Topic 350), which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, determined in Step 1. This guidance will become effective for us in the fiscal years beginning after December 15, 2019, including interim periods within those reporting periods. We will adopt this guidance using a prospective approach. Earlier adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements and will adopt the standard effective October 1, 2020.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements” (“ASU 2018-13”), which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures. ASU 2018-13 is effective for annual and interim periods in the fiscal years beginning after December 15, 2019. Early adoption is permitted. Retrospective adoption is required, except for certain disclosures, which will be required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The Company does not expect the adoption of ASU 2018-13 will have a material impact on its consolidated financial statements and will adopt the standard effective October 1, 2020.
In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Leases (Topic 842). The standard is effective for us on October 1, 2020, with early adoption permitted. The Company does not expect the adoption of ASU 2018-19 to have a material impact on the unaudited consolidated financial statements of the Company. Information regarding the adoption of ASU 2016-02 is described above.
The Company has reviewed other recently issued accounting standards which have not yet been adopted in order to determine their potential effect, if any, on the results of operations or financial condition. Based on the review of these other recently issued standards, the Company does not currently believe that any of those accounting pronouncements will have a significant effect on its current or future financial position, results of operations, cash flows or disclosures.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, and subsequently issued several supplemental and/or clarifying ASU’s (collectively, “ASC 606”), which prescribes a comprehensive new revenue recognition standard that supersedes previously existing revenue recognition guidance. The new model provides a five-step analysis in determining when and how revenue is recognized. The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. The standard allows initial application to be performed retrospectively to each period presented or as a modified retrospective adjustment as of the date of adoption. ASC 606, also provides for certain practical expedients, including the option to expense as incurred the incremental costs of obtaining a contract, if the contract period is for one year or less, and policy elections regarding shipping and handling that provides the option to account for shipping and handling costs as contract fulfillment costs. The Company adopted ASC 606 effective October 1, 2018, the first day of our 2019 fiscal year, using the modified retrospective method. The implementation of ASC 606 did not require an adjustment to the opening balance of retained earnings as of October 1, 2018 (see Note 2. “Revenue Recognition”).
In February 2017, the FASB issued ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets” (ASC 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This standard clarifies the scope and application of ASC 610-20 on the sale, transfer, and derecognition of nonfinancial assets and in substance nonfinancial assets to non-customers, including partial sales. It also provides guidance on how gains and
52
losses on transfers of nonfinancial assets and in substance nonfinancial assets to non-customers are recognized. The standard also clarifies the derecognition of businesses is under the scope of ASC 810. The standard was required to be adopted concurrently with ASC 606, however an entity did not have to apply the same transition method as ASC 606. The Company adopted ASC 610-20 (“ASC 610-20”) effective October 1, 2018, the first day of our 2019 fiscal year, using the modified retrospective method. The implementation of ASC 610-20 resulted in an adjustment to increase the opening balance of retained earnings by $10,897,000, net of taxes, as of October 1, 2018 (see Note 8. “Deferred Gain on Sale”). As a result of the ASU, guidance specific to real estate sales in ASC 360-20 will be eliminated. As such, sales and partial sales of real estate assets will now be subject to the same derecognition model as all other nonfinancial assets.
The ASU will also impact the accounting for partial sales of nonfinancial assets (including in substance real estate). When an entity transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the entity will measure the retained interest at fair value. This will result in full gain/loss recognition upon the sale of a controlling interest in a nonfinancial asset. Current guidance generally prohibits gain recognition on the retained interest.
The ASU was effective for fiscal years beginning after December 15, 2017, and interim periods within those years and thus was effective for the Company for our fiscal year beginning October 1, 2018. The ASU will be applied prospectively to any transaction occurring from the date of adoption. The Company adopted ASU 360-20 effective October 1, 2018. The new guidance did not have a material impact on our consolidated financial statements as it relates to the deferred gain on the sale of the Company’s sugarcane lands (see Note 8. “Deferred Gain on Sale”).
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation” (Topic 718) which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award's fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and thus was effective for the Company for our fiscal year beginning October 1, 2018. The Company adopted ASU 2017-09 effective October 1, 2018. The new guidance did not have a material impact on our consolidated financial statements
In May 2017, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” which clarifies the diversity in the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. Under ASU 2016-18, an entity will be required within the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 effective September 30, 2018 and has properly presented restricted cash within the statement of cash flows. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and thus is effective for the Company for our fiscal year beginning October 1, 2018. Early adoption is permitted and the Company, as such, has adopted this guidance as of October 1, 2017.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230).” This ASU will provide guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. This ASU is effective for the Company for our fiscal year beginning October 1, 2019 with early adoption permitted. The Company adopted ASU 2016-15 effective September 30, 2019 and the impact under this ASU is that the Company reported certain proceeds from insurance claims relating to property and equipment in the statement of cash flows as investing activities in the Consolidated Statement of Cash Flows.
Reclassifications
Certain prior year amounts have been reclassified in the accompanying Financial Statements for consistent presentation to the current period. These reclassifications had no impact on net income, equity, cash flows or working capital as previously reported.
Seasonality
The Company is 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 Alico's fiscal year produce the majority of the Company's 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.
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Note 2. Summary of Significant Accounting Policies
Revenue Recognition
Revenues are derived from the sale of processed fruit, fresh fruit, other citrus revenue, leasing revenue and other water and resource revenues. The majority of the revenue is generated from the sale of citrus fruit to processing facilities and fresh fruit sales. The Company recognizes revenue at the amount it expects to be entitled to be paid, determined when control of the products or services is transferred to its customers, which occurs upon delivery of and acceptance of the fruit by the customer and the Company has a right to payment.
The Company has identified one performance obligation as the delivery of fruit to the processing facility (or harvesting of the citrus in the case of fresh fruit) of the customer for each separate variety of fruit identified in the contract. The Company initially recognizes revenue in an amount which is estimated based on contractual and market prices, if such market price falls within the range (known as “floor” and “ceiling” prices) identified in the specific contracts. Additionally, the Company also has a contractual agreement whereby revenue is determined based on applying a cost-plus structure methodology. As such, since these contracts contain elements of variable consideration, the Company recognizes this variable consideration by using the expected value method. On a quarterly basis, management reviews the reasonableness of the revenues accrued based on buyers’ and processors’ advances to growers, cash and futures markets and experience in the industry. Adjustments are made throughout the year to these estimates as more current relevant industry information becomes available. Differences between the estimates and the final realization of revenues at the close of the harvesting season can result in either an increase or decrease to reported revenues. During the periods presented, no material adjustments were made to the reported citrus revenues.
Receivables under contracts, whereby pricing is based on contractual and market prices, are primarily paid at the floor amount and are collected within seven days after the harvest week. Any adjustments to pricing as a result of changes in market prices are collected or paid thirty to sixty days after final market pricing is published. Receivables under contracts, whereby pricing is based off a cost-plus structure methodology, are paid at the final prior year rate. Any adjustments to pricing as a result of the cost-plus calculation are collected or paid upon finalization of the calculation and agreement by both parties. As of September 30, 2019, and 2018, the Company had total receivables relating to sales of citrus of $160,000 and $1,912,000, respectively, recorded in Accounts Receivable, net, in the Condensed Consolidated Balance Sheets.
Disaggregated Revenue
Revenues disaggregated by significant products and services for the fiscal years ended September 30, 2019, 2018 and 2017 are as follows:
(in thousands) | Fiscal Year Ended September 30, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Alico Citrus | |||||||||||
Early and Mid-Season | $ | 39,574 | $ | 24,309 | $ | 45,999 | |||||
Valencias | 73,480 | 48,865 | 67,146 | ||||||||
Fresh Fruit | 3,629 | 2,054 | 5,735 | ||||||||
Other | 2,348 | 2,893 | 4,561 | ||||||||
Total | $ | 119,031 | $ | 78,121 | $ | 123,441 | |||||
Water Resources and Other Operations | |||||||||||
Land and other leasing | $ | 2,787 | $ | 2,595 | $ | 2,294 | |||||
Sale of calves and culls | — | 57 | 3,732 | ||||||||
Other | 433 | 508 | 362 | ||||||||
Total | $ | 3,220 | $ | 3,160 | $ | 6,388 | |||||
Total Revenues | $ | 122,251 | $ | 81,281 | $ | 129,829 | |||||
During the time that Alico was engaged in the business of raising and selling cattle, Alico recognized revenues from cattle sales at the time the cattle were delivered.
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Alico Fruit Company, LLC ("AFC") operations primarily consist of providing supply chain management services to Alico, as well as to other citrus growers and processors in the state of Florida. AFC also purchases and resells citrus fruit; in these transactions, AFC (i) acts as a principal; (ii) takes title to the products; and (iii) has the risks and rewards of ownership, including the risk of loss for collection, delivery or returns. Therefore, AFC recognizes revenues based on the gross amounts due from customers for its marketing activities. Supply chain management services revenues are recognized when the services are performed.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short term and immediate nature of these financial instruments. The carrying amounts of our debt approximates fair value as the debt is with commercial lenders at interest rates that vary with market conditions or have fixed rates that approximate market rates for obligations with similar terms and maturities (see Note 9. “Fair Value Measurements”).
Cash and Cash Equivalents
The Company considers cash in banks and highly liquid instruments with an original maturity of three months or less to be cash and cash equivalents. At various times throughout the fiscal year, and as of September 30, 2019, some accounts held at financial institutions were in excess of the federally insured limit of $250,000. The Company has not experienced any losses on these accounts and believes credit risk to be minimal.
Restricted Cash
Restricted cash is comprised of cash received from the sale of certain assets in which the use of funds is restricted. For certain sales transactions, the Company sells property which serves as collateral for specific debt obligations. As a result, the sale proceeds can only be used to purchase like-kind citrus groves acceptable to the debt holder or to pay down existing debt obligations. During fiscal year ended September 30, 2019, the Company utilized restricted cash of $1,800,000 towards the purchase of citrus groves. Such purchases are included as part of the collateral under certain debt obligations. If the remaining restricted cash is not used as of September 30, 2020, it will be used to pay down principal on Company debt. Based on the contractual uses of restricted cash, these amounts have been classified as non-current.
Accounts receivable
Accounts receivable from customers are generated from revenues based on the sale of citrus, leasing and other transactions. The Company grants credit in the course of its operations to third party customers. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company provides an allowance for doubtful accounts for amounts which are not probable of collection. The estimate, evaluated quarterly by the Company, is based on historical collection experience, current macroeconomic climate and market conditions and a review of the current status of each customer’s account. Changes in the financial viability of significant customers and worsening of economic conditions may require changes to its estimate of the recoverability of the receivables. Such changes in estimates are recorded in the period in which these changes become known. The bad debt expense is included in general and administrative expenses in the Consolidated Statements of Operations.
The following table presents accounts receivable, net as of September 30, 2019 and 2018:
(in thousands) | September 30, | ||||||
2019 | 2018 | ||||||
Accounts receivable | $ | 746 | $ | 2,577 | |||
Allowance for doubtful accounts | (33 | ) | (33 | ) | |||
Accounts receivable, net | $ | 713 | $ | 2,544 | |||
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Concentrations
Accounts receivable from the Company’s major customer as of September 30, 2019 and 2018 and revenue from such customers for the fiscal years ended September 30, 2019, 2018 and 2017, are as follows:
(in thousands) | Accounts Receivable | Revenue | % of Total Revenue | ||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||
Tropicana | $ | — | $ | 1,797 | $ | 108,318 | $ | 70,396 | $ | 111,197 | 88.6 | % | 86.6 | % | 85.6 | % | |||||||
The citrus industry is subject to various factors over which growers have limited or no control, including weather conditions, disease, pestilence, water supply and market price fluctuations. Market prices are highly sensitive to aggregate domestic and foreign crop sizes, as well as factors including, but not limited to, weather and competition from foreign countries.
Real Estate
In recognizing revenues from land sales, the Company applies specific revenue recognition criteria, in accordance with U.S. GAAP, to determine when land sales revenues can be recorded. For example, in order to fully recognize a gain resulting from a real estate transaction, the sale must be consummated with a sufficient down payment of at least 20% to 25% of the sales price depending upon the type and timeframe for development of the property sold and any receivable from the sale cannot be subject to future subordination. In addition, the seller cannot retain any material continuing involvement in the property sold. When these criteria are not met, the Company recognizes a gain proportionate to collections utilizing either the installment method or deposit method as appropriate.
Inventories
The costs of growing crops, including but not limited to labor, fertilization, fuel, crop nutrition, irrigation and depreciation, are capitalized into inventory throughout the respective crop year. Such costs are expensed as cost of sales when the crops are harvested and are recorded as operating expenses in the Consolidated Statements of Operations. Inventories are stated at the lower of cost or net realizable value. The cost for unharvested citrus crops is based on accumulated production costs incurred during the period from January 1 through the balance sheet date.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation, depletion and amortization. Major improvements are capitalized while expenditures for maintenance and repairs are expensed when incurred. Costs related to the development of citrus groves through planting of trees are capitalized. Such costs include land clearing, excavation and construction of ditches, dikes, roads, and reservoirs, among other costs. After the planting, caretaking costs or pre-productive maintenance costs are capitalized for 4 years. After 4 years, a planting is considered to have reached maturity and the accumulated costs are depreciated over 25 years, except for land clearing and excavation, which are considered costs of land and not depreciated.
Real estate costs incurred for the acquisition, development and construction of real estate projects are capitalized.
Depreciation is provided on a straight-line basis over the estimated useful lives of the depreciable assets, with the exception of leasehold improvements and assets acquired through capital leases, which are depreciated over their estimated useful lives if the lease transfers ownership or contains a bargain purchase option, otherwise the term of the lease.
The estimated useful lives for property and equipment are primarily as follows:
Citrus trees | 25 years |
Equipment and other facilities | 3-20 years |
Buildings and improvements | 25-39 years |
Changes in circumstances, such as technological advances or changes to our business model or capital strategy could result in the actual useful lives differing from the original estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened, Alico depreciates the asset over its revised estimated remaining useful life, thereby increasing depreciation expense (see Note 5. “Property and Equipment, Net”).
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Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company records impairment losses on long-lived assets used in operations, or asset group, when events and circumstances indicate that the assets might be impaired and the estimated cash flows (undiscounted and without interest charges) to be generated by those assets or asset group over the remaining lives of the assets or asset group are less than the carrying amounts of those assets. In calculating impairments and the estimated cash flows, the Company assigns its asset groups by determining the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of the other Company assets. The net carrying values of assets or asset group not recoverable are reduced to their fair values. Alico's cash flow estimates are based on historical results adjusted to reflect best estimates of future market conditions and operating conditions. For fiscal years ended September 30, 2019, 2018 and 2017, the Company recorded impairments to its long-lived assets (see Note 5. “Property and Equipment, Net”). As of September 30, 2019, 2018 and 2017, long-lived assets were comprised of property and equipment.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of acquired businesses over the fair value of the assets acquired less liabilities assumed in connection with such acquisition. In accordance with the provisions of ASC 350, Intangibles-Goodwill and Other, goodwill and intangible assets with indefinite useful lives acquired in an acquisition are not amortized, but instead are tested for impairment at least annually, on the same date, or more frequently should an event occur or circumstances indicate that the carrying amount may be impaired. Such events or circumstances may be a significant change in business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition, changes in strategy or disposition of a reporting unit or a portion thereof.
In the evaluation of goodwill for impairment, Alico has the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If, under the quantitative assessment, the fair value of a reporting unit is less than it's carrying amount, then the amount of the impairment loss, if any, must be measured under step two of the impairment analysis. In step two of the analysis, Alico would record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value, should such a circumstance arise. As of September 30, 2019 and 2018, no impairment was required.
Other Non-Current Assets
Other non-current assets primarily include investments owned in agricultural cooperatives, cash surrender value on life insurance, and deposits on the purchase of citrus trees. Investments in stock related to agricultural cooperatives are carried at cost.
Income Taxes
The Company uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statements and the income tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income or loss in the period that includes the enactment date. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on the Company’s income tax provision and net income or loss in the period the determination is made. For the fiscal years ended September 30, 2019, 2018 and 2017, the Company recorded valuation allowances of $0, $5,634,000 and $581,000, respectively, relating to the unutilized capital loss carryforwards which expired. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs. The Company records interest related to unrecognized tax benefits in income tax expense.
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Earnings per Share
Basic earnings per share for our common stock is calculated by dividing net income attributable to Alico common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares of common stock issuable under equity-based compensation plans in accordance with the treasury stock method, or any other type of securities convertible into common stock, except where the inclusion of such common shares would have an anti-dilutive effect.
The following table presents a reconciliation of basic to diluted weighted average common shares outstanding for fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands) | Fiscal Year Ended September 30, | |||||||
2019 | 2018 | 2017 | ||||||
Weighted Average Common Shares Outstanding - Basic | 7,472 | 8,232 | 8,300 | |||||
Effect of dilutive securities - stock options and unrestricted stock | 21 | 69 | — | |||||
Weighted Average Common Shares Outstanding - Diluted | 7,493 | 8,301 | 8,300 | |||||
For the fiscal years ended September 30, 2019, 2018 and 2017, the Company issued 10,000, 300,000 and 750,000, respectively, stock options to certain executives of the Company. Non-vested restricted shares of common stock entitle the holder to receive non-forfeitable dividends upon issuance and are included in the calculation of diluted earnings per common share. For the fiscal year ended September 30, 2017, the Company had stock options that were excluded from the diluted earnings per share because they were anti-dilutive.
Stock-Based Compensation
Stock-based compensation is measured based on the fair value of the equity award at the grant date and is typically expensed on a straight-line basis over the vesting period. Upon the vesting of restricted stock, the Company issues common stock from common shares held in treasury.
Total stock-based compensation expense for the three years ended September 30, 2019 in general and administrative expense was as follows:
(in thousands) | Fiscal Year Ended September 30, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Stock compensation expense: | |||||||||||
Executives | $ | 778 | $ | 1,754 | $ | 880 | |||||
Executive forfeitures | (823 | ) | — | — | |||||||
Board of Directors | 869 | 859 | 773 | ||||||||
Total stock compensation expense | $ | 824 | $ | 2,613 | $ | 1,653 | |||||
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Note 3. Inventories
Inventories consist of the following at September 30, 2019 and 2018:
(in thousands) | September 30, | ||||||
2019 | 2018 | ||||||
Unharvested fruit crop on the trees | $ | 39,276 | $ | 39,888 | |||
Other | 867 | 1,145 | |||||
Total inventories | $ | 40,143 | $ | 41,033 | |||
The Company records its inventory at the lower of cost or net realizable value. For the fiscal years ended September 30, 2019 and 2018, the Company recorded adjustments to reduce inventory to net realizable value of approximately $808,000 and $1,115,000 respectively. These adjustments to inventory are included in operating expenses in the Consolidated Statements of Operations.
In September 2017, the State of Florida’s citrus business, including the Company’s unharvested citrus crop, was significantly impacted by Hurricane Irma. The impact of Hurricane Irma resulted in the premature drop of unharvested fruit and damage to citrus trees, which will impact fruit production until such time as the citrus trees recover, potentially through the 2018/2019 harvest season. The Company undertook a process to estimate the amount of inventory casualty loss as of the date of Hurricane Irma. Such process included a number of factors including: (1) touring all of the citrus groves by operational personnel to assess the estimated fruit drop by grove and the impact of damage to the citrus trees; (2) consideration of independent estimates of the reduced citrus production for the State of Florida; and (3) an estimate of fruit the Company expects to produce for the 2017/2018 harvest season after Hurricane Irma. As a result, the Company recorded a casualty loss to reduce the carrying value of unharvested fruit crop on trees inventory by approximately $13,489,000.
During the fiscal year ended September 30, 2019, the Company received insurance proceeds relating to Hurricane Irma of approximately $486,000 in additional property and casualty claims reimbursement. There are no further property and casualty or crop insurance claims pending relating to Hurricane Irma. During the fiscal year ended September 30, 2018, the Company received insurance proceeds relating to Hurricane Irma of approximately $477,000 for property and casualty damage claims and approximately $8,952,000 for crop claims. These insurance proceeds are included as a reduction to operating expenses in the Consolidated Statements of Operations.
The Company is eligible for Hurricane Irma federal relief programs for block grants that are being administered through the State of Florida. During the fourth quarter of fiscal year 2019 and for the fiscal year ended September 30, 2019, the Company received approximately $15,597,000 under the Florida Citrus Recovery Block Grant (“CRBG”) program. This represents the Part 1 and a portion of the Part 2 reimbursement under the three-part program. The timing and amount to be received under the remaining portion of the Part 2 and the Part 3 of the program has not been finalized. These federal relief proceeds are included as a reduction to operating expenses in the Consolidated Statements of Operations.
On November 7, 2019 and November 18, 2019, the Company received additional proceeds of approximately $163,800 and approximately $3,973,000, respectively, under the Florida CRBG program. This represents another portion of the Part 2 reimbursement under the three-part program.
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Note 4. Assets Held for Sale
In accordance with its strategy to dispose of non-core and under-performing assets, the following assets have been classified as assets held for sale as of September 30, 2019 and September 30, 2018:
(in thousands) | Carrying Value | ||||||
Fiscal Year Ended September 30, | |||||||
2019 | 2018 | ||||||
East Ranch | $ | 1,442 | $ | 759 | |||
Trailers | — | 456 | |||||
Frostproof Parcels | — | 176 | |||||
Total Assets Held For Sale | $ | 1,442 | $ | 1,391 | |||
During the fiscal year ended September 30, 2019, the Company sold certain trailers for approximately $47,000, and reclassified the remaining Assets Held for Sale to property and equipment, as management has determined not to offer for sale the remaining trailers.
On October 30, 2018, the Company sold certain parcels at Frostproof for approximately $206,000 and realized a gain of approximately $12,000.
On May 2, 2018, the Company sold its Gal Hog property for approximately $7,300,000 and recognized a gain of approximately $6,709,000.
On February 12, 2018, the Company sold its property at Chancey Bay for approximately $4,200,000 and realized a loss of approximately $51,000. As part of the transaction, the Company agreed to pay the purchaser rent of $200,000 in exchange for Alico retaining the rights of harvesting and selling of the fruit in the 2017/2018 harvest season.
On February 9, 2018, the Company sold its nursery located in Gainesville for approximately $6,500,000 and realized a gain of approximately $111,000.
On January 25, 2018, the Company sold its breeding herd to a third party for approximately $7,800,000 and realized a gain of approximately $1,759,000. As part of this transaction, the purchaser is also leasing grazing and other rights on the Ranch from the Company at a rate of $100,000 per month. Upon the sale of a parcel within the East Ranch, the lease rate was adjusted to $98,750 per month.
On January 19, 2018, the Company sold certain trailers to a third party for $500,000. The Company received $125,000 and the remaining portion is to be paid in accordance with a promissory note, which bears interest at 5%, over three years.
On October 30, 2017, the Company sold its corporate office building in Fort Myers, Florida for $5,300,000 and realized a gain of approximately $1,751,000. The sales agreement provides that the Company lease back a portion of the office space for five years. Such lease is classified as an operating lease.
The Company recorded an impairment loss of approximately $152,000 and $150,000 for the fiscal years ended September 30, 2019 and 2018, respectively. These impairments are included in operating expenses on the Consolidated Statements of Operations.
The Company has used a portion of the proceeds to pay down debt (see Note 6. "Long-Term Debt and Lines of Credit") and repurchase common shares and plans to use the remaining cash proceeds from the sale of these assets to pay down debt and to fund future working capital requirements and other corporate purposes.
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Note 5. Property and Equipment, Net
Property and equipment, net consists of the following at September 30, 2019 and September 30, 2018:
(in thousands) | September 30, | ||||||
2019 | 2018 | ||||||
Citrus trees | $ | 281,149 | $ | 264,714 | |||
Equipment and other facilities | 54,622 | 53,544 | |||||
Buildings and improvements | 8,224 | 8,052 | |||||
Total depreciable properties | 343,995 | 326,310 | |||||
Less: accumulated depreciation and depletion | (104,169 | ) | (91,858 | ) | |||
Net depreciable properties | 239,826 | 234,452 | |||||
Land and land improvements | 105,822 | 105,951 | |||||
Property and equipment, net | $ | 345,648 | $ | 340,403 | |||
During the fiscal year ended September 30, 2019, the Company purchased 203 acres of citrus blocks for approximately $1,950,000. These purchases were made from grove owners from within the Company’s existing grove locations. In April 2019, the lender, PGIM Real Estate Finance, LLC (“Prudential”), agreed to accept those purchases completed through April 2019 as substitute collateral and release $1,800,000 from restricted cash, which was completed in the fourth quarter of fiscal year 2019. Subsequent to April 2019, there were two additional purchases of Citrus blocks for approximately $100,000 that are not included as part of the substitution collateral.
On September 27, 2019, the Company sold approximately 5,500 acres from its West Ranch for approximately $14,775,000 and realized a gain on sale of approximately $13,033,000. Upon the sale of these acres, the lease rate pertaining to the grazing and other rights was adjusted from $98,750 to $80,000 per month, as this space was previously being leased to a third party.
On September 29, 2018, the Company sold its property at Island Pond for $7,900,000. As Island Pond was collateralized under one of the Company’s loan documents, $7,000,000 of the proceeds was restricted in use.
On September 28, 2018, The Company sold a parcel within the East Ranch for approximately $1,920,000 and realized a gain of approximately $1,759,000.
On March 30, 2018, the Company sold property located on its Winterhaven location for approximately $225,000 and recognized a loss of approximately $50,000.
On March 15, 2018, the Company sold certain parcels comprised of citrus trees and land located on its Ranch One grove for approximately $586,000 and recognized a loss of approximately $87,000.
On February 2, 2017, the Company sold 49 acres of land and facilities in Hendry County, Florida, to its former tenant for $2,200,000, resulting in a gain of approximately $1,371,000.
During fiscal year ended September 30, 2019, the Company recorded impairments approximately $244,000 relating to the loss of citrus trees. During the fiscal year ended September 30, 2018, the Company recorded impairments aggregating to approximately $2,084,000, which consisted of $1,032,000 relating to Island Pond and $1,052,000 relating to certain citrus trees damaged by Hurricane Irma and from other natural attrition.
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Note 6. Long-Term Debt and Lines of Credit
The following table summarizes long-term debt and related deferred financing costs, net of accumulated amortization at September 30, 2019 and September 30, 2018:
September 30, 2019 | September 30, 2018 | ||||||||||||||
(in thousands) | Principal | Deferred Financing Costs, Net | Principal | Deferred Financing Costs, Net | |||||||||||
Long-term debt, net of current portion: | |||||||||||||||
Met Fixed-Rate Term Loans | $ | 89,688 | $ | 724 | $ | 95,938 | $ | 836 | |||||||
Met Variable-Rate Term Loans | 43,844 | 334 | 46,719 | 385 | |||||||||||
Met Citree Term Loan | 4,750 | 40 | 4,925 | 44 | |||||||||||
Pru Loans A & B | 16,257 | 224 | 17,417 | 241 | |||||||||||
Pru Loan E | 4,455 | 9 | 4,675 | 17 | |||||||||||
Pru Loan F | 4,455 | 38 | 4,675 | 40 | |||||||||||
163,449 | 1,369 | 174,349 | 1,563 | ||||||||||||
Less current portion | 5,338 | — | 5,275 | — | |||||||||||
Long-term debt | $ | 158,111 | $ | 1,369 | $ | 169,074 | $ | 1,563 | |||||||
The following table summarizes lines of credit and related deferred financing costs, net of accumulated amortization at September 30, 2019 and September 30, 2018:
September 30, 2019 | September 30, 2018 | ||||||||||||||
(in thousands) | Principal | Deferred Financing Costs, Net | Principal | Deferred Financing Costs, Net | |||||||||||
Lines of Credit: | |||||||||||||||
RLOC | $ | — | $ | 8 | $ | — | $ | 58 | |||||||
WCLC | — | — | 2,685 | 78 | |||||||||||
Lines of Credit | $ | — | $ | 8 | $ | 2,685 | $ | 136 | |||||||
Future maturities of long-term debt as of September 30, 2019 are as follows:
(in thousands) | |||
Due within one year | $ | 5,338 | |
Due between one and two years | 14,990 | ||
Due between two and three years | 10,755 | ||
Due between three and four years | 10,755 | ||
Due between four and five years | 10,755 | ||
Due beyond five years | 110,856 | ||
Total future maturities | $ | 163,449 | |
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Interest costs expensed and capitalized were as follows:
(in thousands) | Fiscal Year Ended September 30, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Interest expense | $ | 7,180 | $ | 8,561 | $ | 9,141 | |||||
Interest capitalized | 1,019 | 933 | 294 | ||||||||
Total | $ | 8,199 | $ | 9,494 | $ | 9,435 | |||||
Debt
The Company's credit facilities consist of $125,000,000 in fixed interest rate term loans (“Met Fixed-Rate Term Loans”), $57,500,000 in variable interest rate term loans (“Met Variable-Rate Term Loans”), a $25,000,000 revolving line of credit (“RLOC”) with Metropolitan Life Insurance Company and New England Life Insurance Company (collectively “Met”), and a $70,000,000 working capital line of credit (“WCLC”) with Rabo Agrifinance, Inc. (“Rabo”).
The term loans and RLOC are secured by real property. The security for the term loans and RLOC consists of approximately 38,200 gross acres of citrus groves and 5,800 gross acres of Ranch land. The WCLC is collateralized by the Company’s current assets and certain other personal property owned by the Company.
The term loans, collectively, are subject to quarterly principal payments of $2,281,250, and mature November 1, 2029. The Met Fixed-Rate Term Loans bear interest at 4.15% per annum, and the Met Variable-Rate Term Loans bear interest at a rate equal to 90 day LIBOR plus 165 basis points (the “LIBOR spread”). The LIBOR spread is subject to adjustment by Met beginning May 1, 2017 and is subject to further adjustment every two years thereafter until maturity. No adjustment was made at May 1, 2019. Interest on the term loans is payable quarterly. The interest rates on the Met Variable-Rate Term Loans were 3.91% per annum and 3.99% per annum as of September 30, 2019 and September 30, 2018, respectively.
The Company may prepay up to $8,750,000 of the Met Fixed-Rate Term Loan principal annually without penalty, and any such prepayments may be applied to reduce subsequent mandatory principal payments. The maximum annual prepayment was made for calendar year 2015. During the first and second quarter of fiscal year 2018, the Company elected not to make its principal payment and utilized a portion of its 2015 prepayment to satisfy its principal payment requirements for such quarters. At September 30, 2019, the Company had $5,625,000 remaining available from its 2015 prepayment to reduce future mandatory principal payments should the Company elect to do so. The Met Variable-Rate Term Loans may be prepaid without penalty.
The RLOC bears interest at a floating rate equal to 90 day LIBOR plus 165 basis points, payable quarterly. The LIBOR spread was adjusted by the lender on May 1, 2017 and is subject to further adjustment every two years thereafter. No adjustment was made at May 1, 2019. In October 2019, the RLOC agreement was modified to extend the current maturity of November 1, 2019 to November 1, 2029. The RLOC is subject to an annual commitment fee of 25 basis points on the unused portion of the line of credit. The RLOC is available for funding general corporate needs. The variable interest rate was 3.91% and 3.99% per annum as of September 30, 2019 and September 30, 2018, respectively. Availability under the RLOC was $25,000,000 as of September 30, 2019.
The WCLC is a revolving credit facility and is available for funding working capital and general corporate requirements. The interest rate on the WCLC is based on the one month LIBOR, plus a spread, which is adjusted quarterly, based on the Company's debt service coverage ratio for the preceding quarter and can vary from 175 to 250 basis points. The rate is currently at LIBOR plus 175 basis points. The variable interest rate was 3.85% and 3.85% per annum as of September 30, 2019 and September 30, 2018, respectively. The WCLC agreement was amended on September 20, 2018, and the primary terms of the amendment were an extension of the maturity to November 1, 2021. There were no changes to the commitment amount or interest rate. Availability under the WCLC was approximately $69,540,000 and $57,015,000 as of September 30, 2019 and September 30, 2018, respectively.
The WCLC is subject to a quarterly commitment fee on the daily unused availability under the line computed as the commitment amount less the aggregate of the outstanding loans and outstanding letters of credit. The commitment fee is adjusted quarterly based on Alico's debt service coverage ratio for the preceding quarter and can vary from a minimum of 20 basis points to a maximum of 30 basis points. Commitment fees to date have been charged at 20 basis points.
There were no amounts outstanding on the WCLC at September 30, 2019. The WCLC agreement provides for Rabo to issue up to $2,000,000, reduced from $20,000,000 during fiscal year 2019, in letters of credit on the Company’s behalf. As of September 30, 2019, there was approximately $460,000 in outstanding letters of credit, which correspondingly reduced the Company's availability under the line of credit.
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In 2014, the Company capitalized approximately $2,834,000 of debt financing costs related to the refinancing. These costs, together with approximately $339,000 of costs related to the retired debt, are being amortized to interest expense over the applicable terms of the loans. Additionally, approximately $133,000 and $123,000 of financing costs were incurred for the fiscal year ended September 30, 2019 and 2018, respectively, in connection with letters of credit. The costs incurred during fiscal year 2019 are included in other noncurrent assets and will be moved to deferred financing and amortized to interest expense over the applicable terms of the obligations upon completion of the modified agreements, which was in October 2019. All previous costs are included in deferred financing and being amortized to interest expense over the applicable terms of the obligations. The unamortized balance of deferred financing costs related to the financing above was approximately $1,066,000 and approximately $1,357,000 at September 30, 2019 and September 30, 2018, respectively.
These credit facilities noted above are subject to various 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 $160,000,000 increased annually by 10% of consolidated net income for the preceding years, or approximately $163,522,000 for the year ended September 30, 2019, (iii) minimum current ratio of 1.50 to 1.00, (iv) debt to total assets ratio not greater than .625 to 1.00, and, solely in the case of the WCLC, (v) a limit on capital expenditures of $30,000,000 per fiscal year. As of September 30, 2019, the Company was in compliance with all of the financial covenants.
Credit facilities also include a Met Life term loan collateralized by 1,200 gross acres of citrus grove owned by Citree ("Met Citree Loan"). This is a $5,000,000 credit facility that bears interest at a fixed rate of 5.28% per annum. Principal and interest payments are made on a quarterly basis. At September 30, 2019 and 2018, there was an outstanding balance of $4,750,000 and $4,925,000, respectively. The loan matures in February 2029. The unamortized balance of deferred financing costs related to this loan was approximately $40,000 and $44,000 at September 30, 2019 and 2018, respectively.
Transition from LIBOR
The Company is currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates. Currently, the Company has debt instruments in place that reference LIBOR-based rates. The transition from LIBOR is estimated to take place in 2021 and management will continue to actively assess the related opportunities and risks involved in this transition.
Silver Nip Citrus Debt
There are two fixed-rate term loans, with an original combined balance of $27,550,000, bearing interest at 5.35% per annum (“Pru Loans A & B”). Principal of $290,000 is payable quarterly, together with accrued interest. On February 15, 2015, 734 Citrus Holdings, LLC d/b/a Silver Nip Citrus (“Silver Nip Citrus”) made a prepayment of $750,000. In addition, the Company made prepayments of approximately $4,453,000 in the second fiscal quarter of 2018 with proceeds from the sale of certain properties, which were collateralized under these loans. The Company may prepay up to $5,000,000 of principal without penalty. As such, the Company exceeded the allowed $5,000,000 prepayment by approximately $203,000 and was required to make a premium payment of approximately $22,000. The loans are collateralized by approximately 5,700 of citrus groves in Collier, Hardee, Highlands and Polk Counties, Florida and mature on June 1, 2029 and June 1, 2033, respectively.
Silver Nip Citrus entered into two additional fixed-rate term loans with Prudential to finance the acquisition of a 1,500 acre citrus grove on September 4, 2014. Each loan was in the original amount of $5,500,000. Principal of $55,000 per loan is payable quarterly, together with accrued interest. One loan bears interest at 3.85% per annum (“Pru Loan E”), while the other bears interest at 3.45% per annum (“Pru Loan F”). The interest rate on Pru Loan E is subject to adjustment on September 1, 2019 and every year thereafter until maturity. No adjustment was made at September 1, 2019. Both loans are collateralized by approximately 1,500 gross acres of citrus groves in Charlotte County, Florida. Pru Note E matures September 1, 2021, and Pru Note F matures September 1, 2039.
In November 2019, the Company prepaid one of its fixed-rate term loans with Prudential in full in the amount of $4,455,000. As a result of this prepayment, the Company’s required annual principal payments will be reduced by $220,000 per annum.
The Silver Nip Citrus credit agreements are subject to a financial covenant whereby the consolidated current ratio requirement is 1.00 to 1.00. Silver Nip Citrus was in compliance with the current ratio covenant as of September 30, 2019.
The unamortized balance of deferred financing costs related to the Silver Nip Citrus debt was approximately $271,000 and $298,000 at September 30, 2019 and 2018, respectively.
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Note 7. Accrued Liabilities
Accrued liabilities consist of the following at September 30, 2019 and September 30, 2018:
(in thousands) | September 30, | ||||||
2019 | 2018 | ||||||
Ad valorem taxes | $ | 2,117 | $ | 2,196 | |||
Accrued interest | 1,110 | 1,191 | |||||
Accrued employee wages and benefits | 2,525 | 3,115 | |||||
Inventory received but not invoiced | — | 726 | |||||
Accrued dividends | 448 | 492 | |||||
Accrued contractual obligation associated with sale of real estate | 402 | — | |||||
Consulting and separation charges | 400 | — | |||||
Accrued insurance | 544 | 223 | |||||
Accrued tender offer consulting charges | — | 274 | |||||
Other accrued liabilities | 223 | 664 | |||||
Total accrued liabilities | $ | 7,769 | $ | 8,881 | |||
Note 8. Deferred Gain on Sale
Deferred gain on sale consists of the following at September 30, 2019 and September 30, 2018:
(in thousands) | September 30, | ||||||
2019 | 2018 | ||||||
Deferred gain on sale | $ | — | $ | 26,167 | |||
Annual guarantee payment, net | — | (1,239 | ) | ||||
Total deferred gain on sale | $ | — | $ | 24,928 | |||
On November 21, 2014, the Company completed the sale of approximately 36,000 acres of land used for sugarcane production and land leasing in Hendry County, Florida to Global Ag Properties, LLC (“Global”) for approximately $97,900,000 in cash.
The sales price was subject to post-closing adjustments over a ten year period. The Company realized a gain of approximately $42,753,000 on the sale. Initially, $29,140,000 of the gain was deferred due to the Company’s continuing involvement in the property pursuant to a post-closing agreement and the potential price adjustments. The deferral represented the Company’s estimate of the maximum exposure to loss as a result of the continuing involvement. A net gain of approximately $13,613,000 was recognized at the time of the sale.
On October 1, 2018, the Company adopted ASC 610-20 and reevaluated the original post closing agreement under the guidance of ASC 610-20. As such, the Company recorded a derivative asset and derivative liabilities, which resulted in an increase to retained earnings of $10,897,000, net of taxes. This adjustment consisted of recording a derivative asset in the amount of $3,553,000 relating to potential payments due Alico from Global Ag Properties USA, LLC (“Global Ag”) and a derivative liability of $13,864,000 relating to potential payments due Global Ag from Alico. In the first quarter ended December 31, 2018, the Company recorded a loss of $956,000, which reflects the change in fair value of the derivative asset and derivative liabilities. In the three months ended March 31, 2019, the Company recorded an additional loss of $33,000.
On December 7, 2018, the Company and Global Ag entered into a Termination of Post Closing Agreement (the “2018 Post Closing Agreement”), pursuant to which the parties thereto agreed to certain terms and conditions under which a Post Closing Agreement, dated as of November 21, 2014 (the “2014 Post Closing Agreement”), may be terminated prior to the expiration of its stated term and with the payment of certain termination payments. The 2014 Post Closing Agreement was entered into in connection with the November 21, 2014 closing (the “Land Disposition”) of the sale by Alico to Global Ag of certain land used for sugarcane production and land leasing in Hendry County, Florida (the “Land”).
The 2014 Post Closing Agreement contained obligations, including possible payments by Alico and by Global Ag to each other over a ten year period following the closing of the Land Disposition, with the payments each year being based on the difference,
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if any, between certain computed amounts. Since the time of the closing of the Land Disposition and up through March 11, 2019, the computations have resulted in payments being made each year by Alico to Global Ag., which have aggregated approximately $6,518,000.
The 2018 Post Closing Agreement provided for (i) the termination of the 2014 Post Closing Agreement following the satisfaction of certain terms and conditions set forth in the termination agreement and (ii) the deposit by wire transfer into escrow of an aggregate of $11,300,000 following notification by Global Ag to Alico of the closing date of a sale of the Land by Global Ag to a third party. The conditions to the termination of the 2014 Post Closing Agreement and the payment of funds to Global Ag included (a) Global Ag’s assignment to the third party buyer, and such third party buyer’s assumption, of certain specified water management obligations, irrigation and drainage easement obligations, access easements obligations and obligations under a certain option to purchase certain railroad property owned by Alico, (b) delivery to the escrow agent of all instruments and consideration required to consummate the closing by Global Ag of the sale of the Land to the third party buyer, and (c) delivery to the escrow agent of copies of a water management project cooperation agreement running in favor of Alico and signed by Global Ag and the third party buyer.
On March 11, 2019, the 2018 Post Closing Agreement was completed. As such, all the conditions of the termination of the 2014 Post Closing Agreement, mentioned above, were met with the sale of the sugarcane land to a third party. As a result, the Company does not have any future liabilities or commitments to Global Ag in connection with the 2014 Post Closing Agreement.
Note 9. Fair Value Measurements
The Company complies with the provisions of FASB ASC 820 “Fair Value Measurements” for its financial and non-financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis.
ASC 820 clarifies that fair value is an exit price representing the amount that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
• | Level 1- Observable inputs such as quoted prices in active markets; |
• | Level 2- Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
• | Level 3- Unobservable inputs in which there is little or no market data, such as internally developed valuation models which require the reporting entity to develop its own assumptions. |
As of September 30, 2019, the Company did not have any assets held for sale that had been measured at fair value on a non-recurring basis.
The following table represents certain assets held for sale as of September 30, 2018, which have been measured at fair value on a non-recurring basis (see Note 4. "Assets Held for Sale"):
Fair Value Hierarchy | Carrying Value | Adjustment to Fair Value | Fair Value | |||||||
Trailers | Level 3 | $ | 606 | $ | 150 | $ | 456 | |||
The Company uses third-party service providers to assist in the evaluation of investments. For investment valuations, current market interest rates, quality estimates by rating agencies and valuation estimates by active market participants were used to determine values. Deferred retirement benefits were valued based on actuarial data, contracted payment schedules and an estimated discount rate of 4.08% and 4.08% as of September 30, 2019 and 2018, respectively.
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Note 10. Common Stock and Options
Effective January 27, 2015, the Company’s Board of Directors adopted the 2015 Stock Incentive Plan (the “2015 Plan”) which provides for up to 1,250,000 common shares available for issuance to provide a long-term incentive plan for officers, employees, directors and/or consultants to directly link incentives to stockholder value. The 2015 Plan was approved by the Company’s stockholders in February 2015. The Company’s 2015 Plan provides for grants to executives in various forms including restricted shares of the Company’s common stock and stock options. Awards are discretionary and are determined by the Compensation Committee of the Board of Directors. Awards vest based upon service conditions. Non-vested restricted shares generally vest over requisite service periods of one to six years from the date of grant.
Restricted Stock
In November 2017, a senior executive was awarded 5,000 restricted shares of the Company’s common stock (“Restricted Stock”) under the 2015 Plan at a weighted average fair value of $31.95 per common share, vesting over 2.5 years.
The following table represents a summary of the status of the Company’s nonvested shares:
Nonvested Shares | Shares | Weighted-Average Grant Date Fair Value | ||||
Nonvested Shares at September 30, 2016 | 10,267 | $ | 49.49 | |||
Granted during fiscal year 2017 | — | — | ||||
Vested during fiscal year 2017 | (4,933 | ) | 49.58 | |||
Forfeited during fiscal year 2017 | — | — | ||||
Nonvested Shares at September 30, 2017 | 5,334 | 49.39 | ||||
Granted during fiscal year 2018 | 5,000 | 31.95 | ||||
Vested during fiscal year 2018 | (3,001 | ) | 39.70 | |||
Forfeited during fiscal year 2018 | — | — | ||||
Nonvested Shares at September 30, 2018 | 7,333 | 41.46 | ||||
Granted during fiscal year 2019 | — | — | ||||
Vested during fiscal year 2019 | (1,667 | ) | 31.95 | |||
Forfeited during fiscal year 2019 | — | — | ||||
Nonvested Shares at September 30, 2019 | 5,666 | $ | 44.26 | |||
Stock compensation expense related to the Restricted Stock totaled approximately $104,000, $137,000 and $264,000 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively. There was approximately $69,000 and $172,000 of total unrecognized stock compensation costs related to unvested stock compensation for the Restricted Stock grants at September 30, 2019 and September 30, 2018, respectively. The total unrecognized compensation cost is expected to be recognized over a weighted-average period of 0.75 years.
During the fiscal year ended September 30, 2019, 1,667 shares vested aggregating a value of approximately $53,000.
Stock Option Grant
Stock option grants of 10,000 options to Mr. John Kiernan (the “2019 Option Grants”) were granted on October 25, 2018. The option exercise price for these options was set at $33.34, the closing price on October 25, 2018. The 2019 Option Grants will vest as follows: (i) 3,333 of the options will vest if the price of the Company’s common stock during a consecutive 20-trading day period exceeds $40.00; (ii) 3,333 of the options will vest if the price of the Company’s common stock during a consecutive 20-trading day period exceeds $45.00; (iii) 3,334 of the options will vest if the price of the Company’s common stock during a consecutive 20-trading day period exceeds $50.00. If the applicable stock price hurdles have not been achieved by (A) the date that is 18 months following the Executive’s termination of employment, if the Executive’s employment is terminated due to death or disability, (B) the date that is 12 months following the Executive’s termination of employment, if the Executive’s employment is terminated by the Company without cause, by the Executive with good reason, or due to the Executive’s retirement, or (C) the date of the termination of the Executive’s employment for any other reason, then any unvested options will be forfeited. In addition, if the applicable stock price hurdles have not been achieved by December 31, 2021 then any unvested options will be forfeited. The 2019 Option Grants will also become vested to the extent that the applicable stock price hurdles are satisfied in connection
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with a change in control of the Company. As of September 30, 2019, the Company’s stock was trading at $34.02 per share, and during the fiscal year ended September 30, 2019, the stock did not trade above $40.00 per share; accordingly, none of the stock options are vested at September 30, 2019.
Stock option grants of 210,000 options to Mr. Remy Trafelet and 90,000 options to Mr. John Kiernan (collectively, the “2018 Option Grants”) were granted on September 7, 2018. The option exercise price for these options was set at $33.60, the closing price on September 7, 2018. The 2018 Option Grants will vest as follows: (i) 25% of the options will vest if the price of the Company’s common stock during a consecutive 20-trading day period exceeds $35.00; (ii) 25% of the options will vest if the price of the Company’s common stock during a consecutive 20-trading day period exceeds $40.00; (iii) 25% of the options will vest if the price of the Company’s common stock during a consecutive 20-trading day period exceeds $45.00; and (iv) 25% of the options will vest if the price of the Company’s common stock during a consecutive 20-trading day period exceeds $50.00. If the applicable stock price hurdles have not been achieved by (A) the date that is 18 months following the Executive’s termination of employment, if the Executive’s employment is terminated due to death or disability, (B) the date that is 12 months following the Executive’s termination of employment, if the Executive’s employment is terminated by the Company without cause, by the Executive with good reason, or due to the Executive’s retirement, or (C) the date of the termination of the Executive’s employment for any other reason, then any unvested options will be forfeited. In addition, if the applicable stock price hurdles have not been achieved by December 31, 2021 then any unvested options will be forfeited. The 2018 Option Grants will also become vested to the extent that the applicable stock price hurdles are satisfied in connection with a change in control of the Company. As of September 30, 2019, the Company’s stock was trading at $34.02 per share, and during the fiscal ended September 30, 2019, the stock did not trade above $35.00 per share; accordingly, none of the stock options are vested at September 30, 2019. As set forth below, more than a majority of the 2018 Option Grants issued to Mr. Trafelet were forfeited and the vesting conditions of the remainder were modified, all pursuant to the Settlement Agreement, as defined below.
A stock option grant of 300,000 options in the case of Mr. Trafelet and 225,000 options in the case of each of Mr. Henry Slack and Mr. George Brokaw (collectively, the “2016 Option Grants”) were granted on December 31, 2016. The option price was set at $27.15, the closing price on December 31, 2016. The 2016 Option Grants will vest as follows: (i) 25% of the options will vest if the price of the Company’s common stock during a consecutive 20-trading day period exceeds $60.00; (ii) 25% of the options will vest if such price exceeds $75.00; (iii) 25% of the options will vest if such price exceeds $90.00; and (iv) 25% of the options will vest if such price exceeds $105.00. If the applicable stock price hurdles have not been achieved by (A) the second anniversary of the Executive’s termination of employment, if the Executive’s employment is terminated due to death or disability, (B) the date that is 18 months following the Executive’s termination of employment, if the Executive’s employment is terminated by the Company without cause, by the Executive with good reason, or due to the Executive’s retirement, or (C) the date of the termination of the Executive’s employment for any other reason, then any unvested options will be forfeited. In addition, if the applicable stock price hurdles have not been achieved by the fifth anniversary of the grant date (or the fourth anniversary of the grant date, in the case of the tranche described in clause (i) above), then any unvested options will be forfeited. The 2016 Option Grants will also become vested to the extent that the applicable stock price hurdles are satisfied in connection with a change in control of the Company. As of September 30, 2019, the Company’s stock was trading at $34.02 per share, and during the fiscal year ended September 30, 2019, the stock did not trade above $60.00 per share; accordingly, none of the stock options are vested at September 30, 2019. As set forth below, all of the 2016 Option Grants issued to Mr. Trafelet were forfeited pursuant to the Settlement Agreement, as defined below.
Additionally, 187,500 shares of the 2016 Option Grants made to each of Messrs. Slack and Brokaw were forfeited on September 5, 2018 and no replacement options were granted. As such, the remaining unrecognized expense associated with these options of approximately $783,000 was accelerated and recorded for the fiscal year ended September 30, 2018.
Pursuant to a Settlement Agreement (described in Note 15. “Related Party Transactions”), which was unanimously approved by the Board of Directors, Mr. Trafelet agreed to voluntarily resign from his roles as President and Chief Executive Officer and a director of the Company. Under the Settlement Agreement, Mr. Trafelet forfeited (i) all of the 2016 Option Grants granted to him and (ii) all of the 2018 Option Grants granted to him in September 2018, other than 26,250 stock options that will vest if the minimum price of Alico's common stock over 20 consecutive trading days exceeds $35.00 per share and 26,250 stock options that will vest if the minimum price of Alico's common stock over 20 consecutive trading days exceeds $40.00 per share (“2019 Modified Option Grant”), in each case, by the first anniversary of the date of the Settlement Agreement (collectively, the "Retained Options"). Any Retained Options that vest in accordance with their terms will expire on the date that is six months following the date on which the Retained Option vests, and any Retained Options that do not vest by the first anniversary of the Settlement Agreement will be forfeited as of such first anniversary. As a result of the forfeited stock options, the Company reversed $823,000 of previously recorded stock compensation expense during the year ended September 30, 2019, which is recorded as a reduction of General and Administrative expense.
Forfeitures of all stock options were recognized as incurred.
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The following table represents a summary of the Company’s stock option activity:
Weighted Average | ||||||||||||
Weighted | Remaining | Aggregate | ||||||||||
Number of | Average Exercise | Contractual Term | Intrinsic | |||||||||
Options | Price | (years) | Value | |||||||||
Balance - September 30, 2017 | 750,000 | $ | 27.15 | 2.58 | — | |||||||
Granted during fiscal year 2018 | 300,000 | 33.60 | 3.25 | — | ||||||||
Forfeitures/expired in fiscal year 2018 | (375,000 | ) | 27.15 | 1.86 | — | |||||||
Exercised during fiscal year 2018 | — | — | — | — | ||||||||
Balance - September 30, 2018 | 675,000 | 30.02 | 2.22 | — | ||||||||
Granted during fiscal year 2019 | 10,000 | 33.34 | 2.25 | — | ||||||||
Forfeitures/expired in fiscal year 2019 | (457,500 | ) | 29.37 | 1.78 | — | |||||||
Exercised during fiscal year 2019 | — | — | — | — | ||||||||
Balance - September 30, 2019 | 227,500 | $ | 31.46 | 1.22 | — | |||||||
Stock compensation expense related to the options totaled approximately $674,000, $1,617,000 and $616,000 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
At September 30, 2019 and September 30, 2018, there was approximately $502,000 and $2,174,000, respectively, of total unrecognized stock compensation costs related to unvested share-based compensation for the option grants. The total unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.29 years.
The fair value of the 2019, 2018 and 2016 Option Grants was estimated on the date of grant using a Monte Carlo valuation model that uses the assumptions noted in the following table. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the range given below results from different timeframes for the various market conditions being met.
2019 Modified Option Grant
Expected Volatility | 25.0 | % |
Expected Term (in years) | 1.50 | |
Risk Free Rate | 2.52 | % |
The weighted-average grant-date fair value of the 2019 Modified Option Grant was $1.40.
2019 Option Grants
Expected Volatility | 30.0 | % |
Expected Term (in years) | 4.09 | |
Risk Free Rate | 2.95 | % |
The weighted-average grant-date fair value of the 2019 Option Grants was $7.10.
2018 Option Grants
Expected Volatility | 30.0 | % |
Expected Term (in years) | 3.32 | |
Risk Free Rate | 2.80 | % |
The weighted-average grant-date fair value of the 2018 Option Grants was $7.40.
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2016 Option Grants
Expected Volatility | 32.2 | % |
Expected Term (in years) | 2.6 - 4.0 | |
Risk Free Rate | 2.45 | % |
The weighted-average grant-date fair value of the 2016 Option Grants was $3.53. There were no additional stock options granted or exercised for the fiscal year ended September 30, 2019.
As of September 30, 2019, there remained 1,005,000 common shares available for issuance under the 2015 Plan.
Note 11. Treasury Stock
In fiscal year 2017, the Board of Directors authorized the repurchase of up to $7,000,000 of the Company’s common stock in two separate authorizations (collectively, the "2017 Authorization"). In March 2017, the Board of Directors authorized the repurchase of up to $5,000,000 of the Company’s common stock beginning March 9, 2017 and continuing through March 9, 2019. In May 2017, the Board of Directors authorized the repurchase of up to an additional $2,000,000 of the Company’s common stock beginning May 24, 2017 and continuing through May 24, 2019. The stock repurchases made under this repurchase were made through open market transactions at times and in such amounts as the Company’s broker determined subject to the provisions of SEC Rule 10b-18.
During fiscal year 2018, the Company purchased 72,266 shares at a cost of $2,214,756 under the 2017 Authorization. As of June 29, 2018, the Company suspended its stock repurchase activity. For the fiscal year ended September 30, 2019, the Company did not purchase any shares under the 2017 Authorization. As the 2017 Authorization expired in May 2019, the Company has no funds available under this plan to repurchase stock.
On October 3, 2018, the Company completed a tender offer of 752,234 shares at a price of $34.00 per share aggregating $25,575,956. 734 Investors, Alico's largest stockholder from 2013 until November 12, 2019, participated in the tender offer by selling a small percentage of its holdings.
In September 2013, the Board of Directors authorized the repurchase of up to 105,000 shares of the Company’s common stock beginning in November 2013 and continuing through April 2018. In fiscal year 2016, the Board of Directors authorized the repurchase of up to 50,000 shares of the Company’s outstanding common stock beginning February 18, 2016 and continuing through February 17, 2017 (the "2016 Authorization"). In fiscal year 2015, the Board of Directors authorized the repurchase of up to 170,000 shares of the Company’s common stock beginning March 25, 2015 and continuing through December 31, 2016.
The following table illustrates the Company’s treasury stock purchases for the fiscal years ended September 30, 2019, 2018 and 2017:
(in thousands, except share amounts) | Total Number of Shares Purchased | Average Price Paid Per Share | Total Shares Purchased as Part of Publicly Announced Plan or Program | Total Dollar Value of Shares Purchased | |||||||||
Fiscal Year Ended September 30,: | |||||||||||||
2019 | 752,234 | $ | 34.00 | 1,474,640 | $ | 25,576 | |||||||
2018 | 72,266 | $ | 30.65 | 722,406 | $ | 2,215 | |||||||
2017 | 104,145 | $ | 29.42 | 650,140 | $ | 3,064 | |||||||
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The following table outlines the Company’s treasury stock transactions during the past three fiscal years:
(in thousands, except share amounts) | Shares | Cost | ||||
Balance at September 30, 2016 | 100,610 | $ | 4,585 | |||
Purchased | 104,145 | 3,064 | ||||
Issued to Employees and Directors | (27,440 | ) | (1,147 | ) | ||
Balance at September 30, 2017 | 177,315 | 6,502 | ||||
Purchased | 72,266 | 2,215 | ||||
Issued to Employees and Directors | (33,393 | ) | (1,181 | ) | ||
Balance at September 30, 2018 | 216,188 | 7,536 | ||||
Purchased | 752,234 | 25,576 | ||||
Issued to Employees and Directors | (28,790 | ) | (1,169 | ) | ||
Balance at September 30, 2019 | 939,632 | $ | 31,943 | |||
Note 12. Income Taxes
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act contains significant changes to corporate taxes, including a permanent reduction of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The Company’s statutory rate for the fiscal year ended September 30, 2018 was 24.5%, based on a fiscal year blended rate calculation. The 21% U.S. corporate tax rate is fully applicable to the fiscal year ended September 30, 2019 and each year thereafter.
The Act required a one-time remeasurement of certain tax related assets and liabilities. During the first quarter ended December 31, 2017, the Company made certain estimates related to the impact of the Act including the remeasurement of deferred taxes at the new expected tax rate and a revised effective tax rate for the year ended September 30, 2018. For the fiscal year ended September 30, 2018, the Company has recorded a tax benefit of approximately $9,847,000 to account for these deferred tax impacts.
In October 2019, the Internal Revenue Service concluded their audit of the September 30, 2015 tax year with no changes. The Federal and state filings remain subject to examination by tax authorities for tax periods ending after September 30, 2015.
The income tax provision (benefit) for the years ended September 30, 2019, 2018 and 2017 consists of the following:
(in thousands) | Fiscal Year Ended September 30, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Current: | |||||||||||
Federal income tax | $ | 7,314 | $ | 1,961 | $ | 102 | |||||
State income tax | 2,202 | 384 | — | ||||||||
Total current | 9,516 | 2,345 | 102 | ||||||||
Deferred: | |||||||||||
Federal income tax | 2,995 | (3,917 | ) | (3,286 | ) | ||||||
State income tax | 272 | 1,962 | (662 | ) | |||||||
Total deferred | 3,267 | (1,955 | ) | (3,948 | ) | ||||||
Income tax provision (benefit) | $ | 12,783 | $ | 390 | $ | (3,846 | ) | ||||
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Income tax provision (benefit) attributable to income (loss) before income taxes differed from the amount computed by applying the statutory federal income tax rate of 21%, 24.53% and 35% to income (loss) before income taxes for the fiscal years ended September 30, 2019, September 30, 2018 and September 30, 2017, respectively, as a result of the following:
(in thousands) | Fiscal Year Ended September 30, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Income tax (benefit) at the statutory federal rate | $ | 10,587 | $ | 3,198 | $ | (4,670 | ) | ||||
Increase (decrease) resulting from: | |||||||||||
State income taxes, net of federal benefit | 1,947 | 857 | (402 | ) | |||||||
Permanent and other reconciling items, net | 166 | 221 | 548 | ||||||||
Expiration of capital loss carryforward | — | 5,634 | 581 | ||||||||
Reduction in deferred tax liability resulting from the Act | — | (9,847 | ) | — | |||||||
Stock option cancellation | — | 347 | — | ||||||||
Other | 83 | (20 | ) | 97 | |||||||
Income taxes provision (benefit) | $ | 12,783 | $ | 390 | $ | (3,846 | ) | ||||
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of September 30, 2019, and 2018 are presented below:
(in thousands) | September 30, | ||||||
2019 | 2018 | ||||||
Deferred tax assets: | |||||||
Deferred retirement benefits | $ | 1,325 | $ | 1,114 | |||
Investment in Citree | — | 89 | |||||
Deferred gain recognition | — | 6,318 | |||||
Goodwill | 18,244 | 20,095 | |||||
Inventories | 930 | 711 | |||||
Stock compensation | 237 | 261 | |||||
Accrued bonus | — | 612 | |||||
Tax credits | — | 28 | |||||
Intangibles | 565 | 620 | |||||
Other | 168 | 190 | |||||
Total deferred tax assets | 21,469 | 30,038 | |||||
Deferred tax liabilities: | |||||||
Revenue recognized from citrus and sugarcane | — | 162 | |||||
Property and equipment | 52,551 | 54,925 | |||||
Investment in Citree | 909 | — | |||||
Prepaid insurance | 134 | 104 | |||||
Total deferred tax liabilities | 53,594 | 55,191 | |||||
Net deferred income tax liabilities | $ | (32,125 | ) | $ | (25,153 | ) | |
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Note 13. Segment Information
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 the Company’s chief operating decision maker (“CODM”) in deciding how to assess performance and allocate resources. The Company’s CODM assesses performance and allocates resources based on two operating segments: Alico Citrus and Water Resources and Other Operations.
Total revenues represent sales to unaffiliated customers, as reported in the Consolidated Statements of Operations. Goods and services produced by these segments are sold to wholesalers and processors in the United States who prepare the products for consumption. The Company evaluates the segments’ performance based on direct margins (gross profit) from operations before general and administrative expenses, interest expense, other income (expense) and income taxes, not including nonrecurring gains and losses.
Information by operating segment is as follows:
(in thousands) | Fiscal Year Ended September 30, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Revenues: | |||||||||||
Alico Citrus | $ | 119,031 | $ | 78,121 | $ | 123,441 | |||||
Water Resources and Other Operations | 3,220 | 3,160 | 6,388 | ||||||||
Total revenues | 122,251 | 81,281 | 129,829 | ||||||||
Operating expenses: | |||||||||||
Alico Citrus | 59,594 | 51,709 | 111,947 | ||||||||
Water Resources and Other Operations | 2,297 | 3,979 | 8,952 | ||||||||
Total operating expenses | 61,891 | 55,688 | 120,899 | ||||||||
Gross profit (loss): | |||||||||||
Alico Citrus | 59,437 | 26,412 | 11,494 | ||||||||
Water Resources and Other Operations | 923 | (819 | ) | (2,564 | ) | ||||||
Total gross profit | 60,360 | 25,593 | 8,930 | ||||||||
Capital expenditures: | |||||||||||
Alico Citrus | 20,000 | 15,968 | 11,738 | ||||||||
Water Resources and Other Operations | — | 304 | 646 | ||||||||
Other Capital Expenditures | — | 80 | 969 | ||||||||
Total capital expenditures | 20,000 | 16,352 | 13,353 | ||||||||
Depreciation, depletion and amortization: | |||||||||||
Alico Citrus | 12,935 | 12,546 | 14,054 | ||||||||
Water Resources and Other Operations | 173 | 219 | 652 | ||||||||
Other Depreciation, Depletion and Amortization | 816 | 991 | 520 | ||||||||
Total depreciation, depletion and amortization | $ | 13,924 | $ | 13,756 | $ | 15,226 | |||||
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(in thousands) | September 30, | ||||||
2019 | 2018 | ||||||
Assets: | |||||||
Alico Citrus | $ | 401,212 | $ | 405,752 | |||
Water Resources and Other Operations | 15,332 | 15,904 | |||||
Other Corporate Assets | 844 | 1,766 | |||||
Total Assets | $ | 417,388 | $ | 423,422 | |||
Note 14. Employee Benefits Plans
Management Security Plan
The management security plan (“MSP”) is a nonqualified, noncontributory defined supplemental deferred retirement benefit plan for a select group of management personnel. The MSP provides a fixed supplemental retirement benefit for 180 months. The MSP was frozen as of September 30, 2017. As a result, no new participants are being added to the MSP and no further benefits are accumulating. The MSP benefit expense and the projected management security plan benefit obligation are determined using assumptions as of the end of the year. The weighted-average discount rate used to compute the obligation was 4.08% and 4.08% in fiscal years 2019 and 2018, respectively.
Actuarial gains or losses are recognized when incurred; therefore, the end of year benefit obligation is the same as the accrued benefit costs recognized in the Consolidated Balance Sheets.
The amount of MSP benefit expense charged to costs and expenses was as follows:
(in thousands) | Fiscal Year Ended September 30, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Service cost | $ | — | $ | — | $ | 200 | |||||
Interest cost | 171 | 293 | 140 | ||||||||
MSP termination adjustments | 985 | — | — | ||||||||
Recognized actuarial gain (loss) adjustment | 13 | 16 | (78 | ) | |||||||
Total | $ | 1,169 | $ | 309 | $ | 262 | |||||
The following provides a roll-forward of the MSP benefit obligation:
(in thousands) | September 30, | ||||||
2019 | 2018 | ||||||
Change in projected benefit obligation: | |||||||
Benefit obligation at beginning of year | $ | 4,397 | $ | 4,438 | |||
Interest cost | 171 | 293 | |||||
Benefits paid | (340 | ) | (350 | ) | |||
MSP termination adjustments | 985 | — | |||||
Recognized actuarial gain adjustment | 13 | 16 | |||||
Benefit obligation at end of year | $ | 5,226 | $ | 4,397 | |||
Funded status at end of year | $ | (5,226 | ) | $ | (4,397 | ) | |
Effective September 30, 2018, the Company terminated the MSP. Under the MSP termination, payout for benefits covered under the applicable Internal Revenue Code regulations cannot commence until at least twelve months following plan termination decision, but must be fully paid out within twenty-four (24) months following plan termination. The Company has determined to pay out a lump sum under the Equivalent Annuity approach, whereby the payout under this approach would mitigate participants tax burden. In essence, the Company would be covering the amount needed to purchase an annuity providing the same after-tax benefit as if the plan was not terminated. As a result, the Company recorded an additional liability of approximately $720,000.
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The Company has established a “Rabbi Trust” to provide for the funding of accrued benefits under the MSP. According to the terms of the Rabbi Trust, funding is voluntary until a change of control of the Company as defined in the Management Security Plan Trust Agreement occurs. Upon a change of control, funding is triggered. As of September 30, 2019, the Rabbi Trust had no assets, and no change of control had occurred.
Profit Sharing and 401(k) Plans
The Company maintains a 401(k) employee savings plan for eligible employees, which provides up to a 4% matching contribution payable on employee payroll deferrals. The Company’s matching funds vest to the employee immediately, pursuant to a safe harbor election effective in October 2012. The Company’s contribution to the plan was approximately $380,000, $342,000 and $445,000 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
The Profit Sharing Plan (“Plan”) is fully funded by contributions from the Company. Contributions to the Plan are discretionary and determined annually by the Company’s Board of Directors. Contributions to employee accounts are based on the participant’s compensation. The Company’s paid contribution to the Profit Sharing Plan was $0, $0 and $378,000 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
Note 15. Related Party Transactions
Clayton G. Wilson
The Company entered into a Separation and Consulting Agreement with Clayton G. Wilson (the “Separation and Consulting Agreement”), pursuant to which Mr. Wilson stepped down as Chief Executive Officer of the Company effective as of December 31, 2016. Under the Separation and Consulting Agreement, Mr. Wilson also acknowledged and agreed that he would continue to be bound by the restrictive covenants set forth in his Employment Agreement with the Company. The Separation and Consulting Agreement provided that, subject to his execution, delivery, and non-revocation of a general release of claims in favor of the Company, Mr. Wilson would be entitled to vesting of any unvested portion of the restricted stock award granted to him under his Employment Agreement. In addition, the Separation and Consulting Agreement provided that Mr. Wilson serve as a consultant to the Company during 2017 and would receive an aggregate consulting fee of $750,000 for such services (payable $200,000 in an initial lump sum, $275,000 in a lump sum on July 1, 2017, and $275,000 in six equal monthly installments commencing July 31, 2017 and ending December 31, 2017). As of December 31, 2017, the Company satisfied its obligation to Mr. Wilson in full. The Company expensed approximately $0, $187,500 and $562,500 under the Separation and Consulting Agreement for the fiscal years ended September 30, 2019, 2018 and 2017, respectively. Mr. Wilson resigned as a member of the Company’s Board of Directors effective February 27, 2017.
Henry R. Slack and George R. Brokaw
On December 31, 2016, the Company entered into new employment agreements (collectively, the “Employment Agreements”) with Henry R. Slack, and George R. Brokaw. Mr. Slack previously served as the Executive Chairman of the Company, and Mr. Brokaw currently serves as the Executive Vice Chairman of the Company, and each of them continues to serve on the Company’s Board of Directors. The Employment Agreements provided for an annual base salary of $250,000 in the case of Mr. Slack and provides for an annual base salary of $250,000 in the case of Mr. Brokaw.
Beginning June 26, 2017, both Messrs. Slack and Brokaw agreed to waive payment of their salaries.
Effective July 1, 2019, Mr. Slack resigned his employment with the Company as Executive Chairman. Mr. Slack continues to serve on the Board of the Company.
Remy W. Trafelet
As described above, on February 11, 2019 and as contemplated by the Alico Settlement Agreement, Mr. Trafelet submitted to the Board his resignation as President and Chief Executive Officer of the Company and a member of the Board, effective upon the execution of the Alico Settlement Agreement. Also, on February 11, 2019, as contemplated by the Settlement Agreement, the Company entered into a consulting agreement (the "Consulting Agreement") with Mr. Trafelet and 3584 Inc., an entity controlled by Mr. Trafelet (the "Consultant"). Pursuant to the Consulting Agreement, Mr. Trafelet will make himself available to provide consulting services to the Company through the Consultant for up to 24 months. In exchange for the consulting services, the Consultant will receive an annual consulting fee of $400,000. As of September 30, 2019, the Company has paid approximately $254,000 towards these consulting fees. If the Company terminates the consulting period (other than in certain specified
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circumstances), the Company will continue to pay the consulting fees described in the immediately preceding sentence through the balance of the 24-month term.
Ken Smith
On March 20, 2015, Ken Smith tendered his resignation as Chief Operating Officer, and as an employee of the Company. Mr. Smith’s resignation included a waiver of any rights to any payments under his Change-in-Control Agreement with the Company. On March 20, 2015, the Company and Mr. Smith also entered into a Consulting and Non-Competition Agreement under which (i) Mr. Smith will provide consulting services to the Company during the three-year period after the resignation date, (ii) Mr. Smith agreed to be bound by certain non-competition covenants relating to the Company’s citrus operations and non-solicitation and non-interference covenants for a period of two years after the resignation date, and (iii) the Company paid Mr. Smith $925,000 for such services and covenants. The Company expensed approximately $0, $0 and $100,000 under the Consulting and Non-Competition Agreement for fiscal years ended September 30, 2019, 2018 and 2017, respectively.
Shared Services Agreement
The Company had a shared services agreement with Trafelet Brokaw Capital Management, L.P. (“TBCM”), whereby the Company reimbursed TBCM for use of office space and various administrative and support services. The agreement expired December 31, 2018 and was not extended or renewed. The annual cost of the office and services was approximately $618,000. The Company expensed approximately $155,000, $592,000 and $564,000 for the fiscal years ended September 30, 2019, 2018 and 2017, respectively. As of September 30, 2019 and 2018, the Company had outstanding amounts due of approximately $0 and $163,000, respectively.
Capital Contribution
On April 16, 2018, all operating partners of Citree received a funding notice relating to an additional Cash Capital Contribution (“Contribution”) requirement of approximately $2,041,000 as a result of Hurricane Irma, which reduced the amount of crop available for sale in the 2017-2018 harvest season and the Company’s adoption of a more extensive caretaking plan focused on limiting the impact of citrus greening. The Company’s portion of the Contribution was approximately $1,041,000 and was funded on April 27, 2018. The remaining portion of the Contribution of $1,000,000 was funded by the noncontrolling parties.
Distribution of Shares by Alico’s Largest Shareholder
On November 12, 2019, 734 Investors, the Company’s largest shareholder, distributed the 3,173,405 shares of Company common stock held by it, on a pro rata basis, to its members. We understand this share distribution was made in anticipation of the dissolution of 734 Investors later this year. Transfers of these shares are not registered on any current Alico registration statement, but the shares are potentially transferable pursuant to Rule 144, subject to certain customary restrictions.
Note 16. Commitments and Contingencies
Operating Leases
The Company has obligations under various non-cancelable long-term operating leases primarily for office space and equipment. In addition, the Company has various obligations under other equipment leases of less than one year.
Total rent expense was approximately $450,000, $1,062,000 and $725,000 for the years ended September 30, 2019, 2018 and 2017, respectively.
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The future minimum annual rental payments under non-cancelable operating leases are as follows:
(in thousands) | |||
2020 | $ | 191 | |
2021 | 169 | ||
2022 | 175 | ||
2023 | 15 | ||
Total | $ | 550 | |
Purchase Commitments
The Company enters into contracts for the purchase of citrus trees during the normal course of its business. As of September 30, 2019, the Company had approximately $1,603,000 relating to outstanding commitments for these purchases that will be paid upon delivery of the remaining citrus trees.
Letters of Credit
The Company had outstanding standby letters of credit in the total amount of approximately $460,000 and $10,300,000 at September 30, 2019 and September 30, 2018, respectively, to secure its various contractual obligations. Upon the completion of the 2018 Post Closing Agreement (and corresponding termination of the 2014 Post Closing Agreement), the Company terminated its $9,800,000 standby letter of credit associated with the Global Ag Land Disposition transaction (see Note 8. “Deferred Gain on Sale”).
Legal Proceedings
Florida Litigation
On November 16, 2018, 734 Agriculture, RCF 2014 Legacy LLC, Delta Offshore Master II, LTD. and Mr. Remy W. Trafelet (the “Trafelet Parties”), who was at the time the Company's President and Chief Executive Officer and a member of the Board of Directors, filed a lawsuit against Messrs. George R. Brokaw, Henry R. Slack, W. Andrew Krusen and Greg Eisner, members of the Board of Directors, in the Circuit Court (the “Circuit Court”) for Hillsborough County, Florida (the “Florida Litigation”). The Trafelet Parties sought, among other things, a declaration that (1) a purported stockholder action by written consent, delivered to the Company in the name of 734 Investors and the plaintiffs in the Florida Litigation on November 11, 2018 (the “Purported Consent”) was valid and binding, (2) the resolutions passed at a meeting of the Board of Directors on November 12, 2018, to, among other things, constitute an ad hoc committee of the Board of Directors to consider, evaluate and make any and all determinations, and to take any and all actions, on behalf of the Board of Directors, in connection with the Purported Consent were null and void and (3) the four defendants in the Florida Litigation were properly removed from the Board of Directors by the Purported Consent. On November 27, 2018, the Circuit Court denied without prejudice plaintiffs’ motion for a temporary restraining order and an affirmative injunction restoring Mr. Trafelet from administrative leave to active status in his capacity as President and CEO of the Company.
On November 28, 2018, the parties in the Florida Litigation stipulated to an order which provided, pending the resolution of the Delaware Litigation (as defined below), that (1) the record date for the Purported Consent was stayed indefinitely, and (2) Mr. Trafelet and the Company’s Board of Directors should not take any action out of routine day-to-day operations conducted in the ordinary course of business, including any action to change the corporate governance of Alico or removing any corporate officers or directors from positions held as of November 27, 2018.
On December 6, 2018, the Trafelet Parties filed an amended complaint in the Florida Litigation which added the Company and Benjamin D. Fishman, a member of the Board of Directors, as defendants. On December 21, 2018, the Trafelet Parties filed a renewed motion for a preliminary injunction restoring Mr. Trafelet from administrative leave to active status in his capacity as President and CEO of the Company. On January 14, 2019, the defendants in the Florida Litigation filed an opposition to plaintiffs’ renewed motion for a preliminary injunction. On January 18, 2019, the defendants in the Florida Litigation filed a motion to dismiss the plaintiffs’ amended complaint.
On February 11, 2019, the parties to the Florida Litigation entered into a settlement agreement (the “Alico Settlement Agreement”) wherein the parties agreed to promptly dismiss all claims in the Florida Litigation. Pursuant to the Alico Settlement Agreement,
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Mr. Trafelet agreed to voluntarily resign as President and Chief Executive Officer and as a member of the Board of Directors, effective upon the execution of the Alico Settlement Agreement.
As contemplated by the Alico Settlement Agreement, on February 11, 2019, the Company entered into a consulting agreement (the “Consulting Agreement”) with Mr. Trafelet and 3584 Inc., an entity controlled by Mr. Trafelet (the “Consultant”). Pursuant to the Consulting Agreement, Mr. Trafelet agreed to make himself available to provide consulting services to the Company through the Consultant for up to 24 months. In exchange for the consulting services, the Consultant is receiving an annual consulting fee of $400,000. If the Company terminates the consulting period (other than in certain specified circumstances), the Company will continue to pay the consulting fees described in the immediately preceding sentence through the balance of the 24-month term. As such, the Company recorded the $800,000 as an expense for the fiscal year ended September 30, 2019.
In addition, on February 11, 2019, as contemplated by the Alico Settlement Agreement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with Mr. Trafelet, relating to the shares of the Company’s common stock directly held by the Trafelet Parties as of February 11, 2019 (the “Registrable Securities”). The Registration Rights Agreement required the Company to, among other things and subject to the terms and conditions thereof, use reasonable best efforts to file with the SEC a registration statement on Form S-3 covering the resale of the Registrable Securities. On October 10, 2019, Mr. Trafelet executed a waiver whereby he waived the S-3 Registration Rights but maintained all other rights arising under the Registration Rights Agreement and all rights arising under Section 14 of the Alico Settlement Agreement.
Delaware Litigation
On November 20, 2018, members of 734 Investors filed a lawsuit against 734 Agriculture and Mr. Trafelet, who was at the time the Company's President and Chief Executive Officer and a member of the Board of Directors in the Delaware Court of Chancery (the "Delaware Court"), captioned Arlon Valencia Holdings v. Trafelet, C.A. No. 2018-0842-JTL (the “Members’ Delaware Litigation”). The plaintiffs sought, among other things, a declaration that (1) 734 Agriculture was validly replaced as the managing member of 734 Investors pursuant to the Amended and Restated Limited Liability Company Operating Agreement of 734 Investors (the “LLC Agreement”) and November 19, 2018 resolution by written consent to remove 734 Agriculture as managing member of 734 Investors, and to designate Arlon Valencia Holdings, LLC as the new managing member of 734 Investors (the “734 Consent”), and (2) the Purported Consent was invalid under the LLC Agreement.
Also, on November 20, 2018, 734 Agriculture filed a lawsuit contesting the 734 Consent in the Delaware Court, captioned 734 Agriculture v. Arlon Valencia Holdings, LLC, C.A. No. 2018-0844-JTL (the “734 Delaware Litigation”). On November 27, 2018, the Delaware Court entered a stipulated order consolidating the Members’ Delaware Litigation and the 734 Delaware Litigation into a single lawsuit, captioned In re 734 Investors, LLC Litigation, Consol. C.A. No. 2018-0844-JTL (the consolidated suit, the “Delaware Litigation”).
On December 5, 2018, the Delaware Court entered a stipulated status quo order which provided, among other things, that 734 Agriculture was to serve as the managing member of 734 Investors during the pendency of the Delaware Litigation. The status quo order also provided that 734 Agriculture would not be permitted to take any actions outside of the ordinary course of business of 734 Investors without the consent of two-thirds of the membership interests of 734 Investors, including exercising any voting rights with respect to any shares of the Company’s common stock beneficially owned by 734 Investors.
On February 11, 2019, Mr. Trafelet, 734 Agriculture, 734 Investors, and certain members of 734 Investors entered into a settlement agreement (the “734 Investors Settlement Agreement”) wherein the parties agreed to promptly dismiss all claims in the Delaware Litigation. Pursuant to the 734 Investors Settlement Agreement, 734 Agriculture resigned as Managing Member of 734 Investors and Arlon Valencia Holdings, LLC was confirmed as Managing Member of 734 Investors.
From time to time, Alico may be involved in litigation relating to claims arising out of its operations in the normal course of business. There are no other current legal proceedings to which the Company is a party or of which any of its property is subject that it believes will have a material adverse effect on its financial position, results of operations or cash flows.
Note 17. Subsequent Event
On December 5, 2019, the Board of Directors of the Company declared a first quarter of fiscal year 2020 cash dividend of $0.09 per share on its outstanding common stock to be paid to shareholders of record as of December 27, 2019, with payment expected on January 10, 2020.
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Note 18. Selected Quarterly Financial Data (unaudited)
Summarized quarterly financial data for the fiscal years ended September 30, 2019, and 2018 are computed independently each quarter, therefore, the sum of the quarter amounts may not equal the total amount for the respective year due to rounding as follows:
(in thousands, except per share amounts) | Fiscal Quarter Ended | ||||||||||||||||||||||||||
December 31, | March 31, | June 30, | September 30, | ||||||||||||||||||||||||
2018 | 2017 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||
Total operating revenues | $ | 14,779 | $ | 17,533 | $ | 48,521 | $ | 35,600 | $ | 57,565 | $ | 26,517 | $ | 1,386 | $ | 1,631 | |||||||||||
Total operating expenses | 11,597 | 16,951 | 32,207 | 27,767 | 31,561 | 14,603 | (13,474 | ) | (3,633 | ) | |||||||||||||||||
Gross profit | 3,182 | 582 | 16,314 | 7,833 | 26,004 | 11,914 | 14,860 | 5,264 | |||||||||||||||||||
General and administrative expenses | 3,450 | 3,886 | 4,654 | 3,073 | 2,682 | 2,955 | 4,360 | 5,144 | |||||||||||||||||||
Other (expense) income, net | (2,864 | ) | (375 | ) | (1,972 | ) | (2,140 | ) | (1,623 | ) | 5,074 | 11,478 | 96 | ||||||||||||||
Income (loss) before income taxes | (3,132 | ) | (3,679 | ) | 9,688 | 2,620 | 21,699 | 14,033 | 21,978 | 216 | |||||||||||||||||
Income tax (benefit) expense | (629 | ) | (12,417 | ) | 2,228 | 8,150 | 5,483 | 4,941 | 5,701 | (284 | ) | ||||||||||||||||
Net (loss) income | (2,503 | ) | 8,738 | 7,460 | (5,530 | ) | 16,216 | 9,092 | 16,277 | 500 | |||||||||||||||||
Net loss attributable to noncontrolling interests | 36 | 8 | 87 | 16 | 28 | 8 | 232 | 218 | |||||||||||||||||||
Net income (loss) attributable to Alico Inc. common stockholders | $ | (2,467 | ) | $ | 8,746 | $ | 7,547 | $ | (5,514 | ) | $ | 16,244 | $ | 9,100 | $ | 16,509 | $ | 718 | |||||||||
Earnings per share: | |||||||||||||||||||||||||||
Basic | $ | (0.33 | ) | $ | 1.06 | $ | 1.01 | $ | (0.67 | ) | $ | 2.17 | $ | 1.11 | $ | 2.21 | $ | 0.09 | |||||||||
Diluted | $ | (0.33 | ) | $ | 1.05 | $ | 1.01 | $ | (0.67 | ) | $ | 2.17 | $ | 1.09 | $ | 2.21 | $ | 0.09 | |||||||||
Total operating expenses for the fiscal quarter ended June 30, 2018 include insurance proceeds relating to Hurricane Irma of $477,000 for property and casualty damage claims and $3,726,000 for crop claims. Total operating expenses for the fiscal quarter ended September 30, 2018 included insurance proceeds relating to the Hurricane Irma of $5,226,000 for crop damage claims. Total operating expenses for the fiscal quarter ended September 30, 2019 includes insurance proceeds received of approximately $486,000 in additional property and casualty claims reimbursement relating to Hurricane Irma and block grants of approximately $15,597,000 under the Florida Citrus Recovery Block Grant (“CRBG”) program relating to Hurricane Irma. General and administrative expenses for the fiscal quarter ended September 30, 2019 include pension expense of $935,000 relating to termination of employee benefit plan (see Note 14. “Employee Benefit Plans” for further detail). Other income for the fiscal quarter ended September 30, 2019 includes a gain on sale of assets of approximately $13,166,000 (see Note 3. “Inventories”, Note 4. “Assets Held For Sale” and Note 5. “Property and Equipment, Net” for further information).
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures. |
Our Principal Executive Officer and Chief Financial Officer have evaluated the effectiveness of the 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 the end of the period covered by this report. Based on this evaluation, our Principal Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
(b) | Changes in Internal Control over Financial Reporting. |
During the fourth fiscal quarter ended September 30, 2019, 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.
(c) | Management Report on Internal Control Over Financial Reporting |
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) | pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
(ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2019. In making this assessment, management used the criteria described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on our assessment and those criteria, management concluded that our internal control over financial reporting was effective as of September 30, 2019. Management reviewed the results of their assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of September 30, 2019 has been audited by RSM US LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.
Item 9B. Other Information
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers;
Compensatory Arrangements of Certain Officers.
(e)
On December 2, 2019, the Company entered into a new employment agreement (the “Rallo Employment Agreement”) with Richard Rallo. Mr. Rallo serves as Chief Financial Officer of the Company. The Rallo Employment Agreement provides for an annual base salary of $275,000. Mr. Rallo is eligible for an annual incentive compensation award with an annual target opportunity in an amount equal to 40% of his annual base salary.
The Rallo Employment Agreement also provides that, if Mr. Rallo’s employment is terminated by the Company without “cause” or Mr. Rallo resigns with “good reason” (as each such term is defined in the Rallo Employment Agreement), then, subject to his
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execution, delivery, and non-revocation of a general release of claims in favor of the Company, Mr. Rallo will be entitled to (i) cash severance in an amount equal to 12 months of the annual base salary, (ii) the Accrued Obligations (as defined in the Rallo Employment Agreement) in a cash lump sum within 30 days after the date of termination, (iii) any rights or payments that are vested benefits or that Mr. Rallo is otherwise entitled to receive at or subsequent to the date of termination under any employee benefit plan or any other contract or agreement with the Company, and (iv) any Annual Bonus (as defined in the Rallo Employment Agreement) that has been earned but not paid as of the date of termination.
The Rallo Employment Agreement includes various restrictive covenants in favor of the Company, including a confidentiality covenant, a non-disparagement covenant, and 12-month post-termination noncompetition and customer and employee non-solicitation covenants.
In addition to his position as Chief Financial Officer, Mr. Rallo retains his position as the Company’s Principal Accounting Officer.
The foregoing description of the Rallo Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Rallo Employment agreement, which is attached hereto as Exhibit 10.37 to this Annual Report on Form 10-K and is incorporated herein by reference.
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PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a definitive Proxy Statement for the 2020 Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934, (the “Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and the applicable information included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning our directors and nominees and other information as required by this item are hereby incorporated by reference from our Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that is intended to serve as a code of ethics for purposes of Item 406 of Regulation S-K. Our Code of Business Conduct and Ethics is posed on our website http://www.alicoinc.com (at the Investor homepage under "Corporate Governance") and we intend to disclose on our website any amendments to, or waiver from, such code.
Item 11. Executive Compensation
The information required by Item 11 regarding executive compensation is included under the headings “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning the ownership of certain beneficial owners and management and related stockholder matters is hereby incorporated by reference to our Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
Equity Compensation Arrangements
Effective January 27, 2015, the Board of Directors adopted the 2015 Stock Incentive Plan (the “2015 Plan”) which provides for up to 1,250,000 shares of the Company’s common stock to be available for issuance to provide a long-term incentive plan for officers, employees, directors and/or consultants to directly link incentives to stockholders' value. The 2015 Plan was approved by stockholders in February 2015.
The following table illustrates the common shares remaining available for future issuance under the 2015 Plan as of September
30, 2019:
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity plans | |||||
Plan Category: | |||||||
Equity compensation plans approved by security holders | 227,500 | $ | 31.46 | 1,005,000 | |||
Equity compensation plans not approved by security holders | — | N/A | — | ||||
Total | 227,500 | $ | 31.46 | 1,005,000 | |||
In November 2017, the Company awarded 5,000 restricted shares to one senior executive under the 2015 Plan.
In September 2018, the Company awarded 300,000 stock options to two senior executives under the 2015 Plan. Additionally, in September 2018, two other senior executives forfeited an aggregate of 375,000 stock options, which were originally issued under the 2015 Plan and no replacement options were granted.
In October 2018, the Company awarded 10,000 stock options to one senior executive under the 2015 Plan.
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In February 2019, pursuant to a settlement agreement, a senior executive of the Company forfeited an aggregate of 457,500 stock options, which were originally issued under the 2015 Plan and no replacement options were granted.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information concerning relationships and related transactions is hereby incorporated by reference to our Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
Item 14. Principal Accountants Fees and Services
Information concerning principal accounting fees and services is hereby incorporated by reference to our Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) | Documents filed as part of this report |
(1) | Financial Statements: |
Our Consolidated Financial Statements are included in Part II, Item 8 of this Annual Report on Form 10-K.
(2) | Financial Statement Schedules: |
Financial statement schedules are omitted as the required information is either inapplicable or the information is presented in our Consolidated Financial Statements or notes thereto.
(3) | Exhibits |
The exhibits listed in the Exhibit Index in (b) below are filed or incorporated by reference as part of this Annual Report on Form 10-K.
(b) | Exhibit Index |
Item 16. Form 10-K Summary
Not applicable.
Exhibit Number | Exhibit Index | |
2.1 | *** | |
2.2 | *** | |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
10.1 | ||
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10.2 | ||
10.3 | * | |
10.4 | * | |
10.5 | ||
10.6 | *** | |
10.7 | *** | |
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
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10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26*** | ||
10.27 | ||
10.28 | ||
10.29 | ||
10.30 | ||
10.31* | ||
10.32* | ||
10.33* | ||
10.34* | ||
10.35* | ||
10.36* | ||
10.37* | ||
10.38 | ||
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10.39 | ||
10.40 | ||
10.41 | ||
10.42 | ||
10.43 | ||
10.44 | ||
10.45 | ||
10.46 | ||
10.47 | ||
10.48 | * | |
21.0 | ||
23.0 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | ||
101.INS | ** | |
101.SCH | ** | XBRL Taxonomy Extension Schema Document |
101.CAL | ** | |
101.DEF | ** | |
101.LAB | ||
101.PRE | ||
* | Denotes a management contract or compensatory plan, contract or arrangement. | |
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** | In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections. | |
*** | Certain schedules and exhibits have been omitted from this filing pursuant to Item 601(b) (2) of Regulation S-K. The Company will furnish supplemental copies of any such schedules or exhibits to the SEC upon request. | |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALICO, INC. (Registrant) | |||
December 5, 2019 | By: | /s/ John E. Kiernan | |
John E. Kiernan | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
December 5, 2019 | President and Chief Executive Officer (Principal Executive Officer) | /s/ John E. Kiernan |
John E. Kiernan | ||
December 5, 2019 | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | /s/ Richard Rallo |
Richard Rallo | ||
December 5, 2019 | Director: Executive Chairman | /s/ Benjamin D. Fishman |
Benjamin D. Fishman | ||
December 5, 2019 | Director | /s/ George R. Brokaw |
George R. Brokaw | ||
December 5, 2019 | Director | /s/ R. Greg Eisner |
R. Greg Eisner | ||
December 5, 2019 | Director | /s/ Henry R. Slack |
Henry R. Slack | ||
December 5, 2019 | Director | /s/ W. Andrew Krusen |
W. Andrew Krusen | ||
December 5, 2019 | Director | /s/ Toby K. Purse |
Toby K. Purse | ||
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