Item 7. Management’s Discussion and Analysis
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 of Financial Condition 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, including tax laws and tax rates; climate change; 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 refinancing; availability of financing for land development activities and other growth and corporate opportunities; onetime events; acquisitions and divestitures; ability to make strategic acquisitions or divestitures; ability to redeploy proceeds from divestitures; ability to consummate selected land acquisitions; ability to take advantage of tax deferral options; seasonality; 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; impact of the COVID-19 outbreak and coronavirus pandemic on our agriculture operations, including without limitation demand for product, supply chain, health and availability of our labor force, the labor force of contractors we engage, and the labor force of our competitors; other risks related to the duration and severity of the COVID-19 outbreak and coronavirus pandemic and its impact on Alico’s business; the impact of the COVID-19 outbreak and coronavirus pandemic on the U.S. and global economies and financial markets, including without limitation related legislative and regulatory initiatives; access to governmental loans and incentives; any reduction in the public float resulting from repurchases of common stock by Alico; changes in equity awards to employees; whether the Company's dividend policy, including its recent increased dividend amounts, is continued; 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 designed to consummate such expressed desire; political changes and economic crises; ability to implement ESG initiatives; competitive actions by other companies; increased competition from international companies; changes in environmental regulations and their impact on farming practices; 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; length of terms of contracts with customers; impact of concentration of sales to one customer; and 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 forward-looking statements 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.
26
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 83,000 acres of land and approximately 90,000 acres of mineral rights throughout Florida. Alico holds these mineral rights on substantially all its owned acres, with additional mineral rights on other acres. Our principal lines of business are now citrus groves and land management and other operations, which include land conservation, encompassing environmental services, land leasing and related support operations. Prior to the sale of certain ranch land to the State of Florida in September 2020, the Company’s business line also included Water Resources. 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 each of the three fiscal years in the period ended September 30, 2021. Our discussion is presented on a consolidated basis and includes certain discussions 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 in the period ended September 30, 2021 and our outstanding debt, commitments and cash resources as of September 30, 2021.
•
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, caretaking management services, and grazing and hunting leasing. The Company operates as two business segments and all of its operating revenues are generated in the United States. For the fiscal year ended September 30, 2021, the Company generated operating revenues of approximately $108,564,000, income from operations of approximately $14,440,000, and net income attributable to common stockholders of approximately $34,859,000. Cash provided by operating activities was approximately $16,504,000 for the fiscal year ended September 30, 2021.
Fiscal Year Highlights and Other Developments
The COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the current novel coronavirus outbreak (“COVID-19”) to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have had a significant adverse impact upon many sectors of the economy, including certain agriculture businesses.
On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) posted an Emergency Temporary Standard (“ETS”) on mandating that all private employers with 100 or more employees ensure their employees are COVID-19 fully vaccinated before entering the employer’s worksite or, at the employer’s option, require employees who remain unvaccinated and want to come to the worksite to wear an approved face covering and produce a negative COVID-19 test at least weekly. Pursuant to the ETS, employers must offer up to four hours of additional paid time off, including travel time, per vaccine dose to allow employees to be vaccinated and reasonable time and paid sick leave to recover from side effects experienced after each vaccine dose. Pursuant to the ETS, the ETS remains in effect for a maximum of six months. This ETS implements President Biden’s COVID-19 Action Plan, which aims to accelerate the pace of COVID-19 vaccinations in the United States.
27
The ETS is effective immediately upon its publication in the Federal Register. Pursuant to the ETS, employers must comply with most requirements within 30 days of publication (December 5th) and with optional testing requirements within 60 days of publication (January 4th). Employees who have completed their vaccination by that date do not have to be tested, even if they have not yet completed the 2-week waiting period. On November 6, 2021, the Fifth Circuit Court of Appeals granted an emergency motion to stay enforcement of the ETS, subject to the resolution of ongoing litigation challenging the constitutionality of the ETS. The order enjoins the federal government from taking any action to enforce the ETS while it is in effect. On November 12, 2021, the Fifth Circuit Court of Appeals reaffirmed its suspension of the ETS and, on November 16, 2021, OSHA announced it suspended its activities related to the implementation and enforcement of the ETS pending future developments in the litigation. It is unknown how long the Fifth Circuit’s stay will remain in place. The Sixth Circuit Court of Appeals was selected through the lottery system on November 16, 2021, to hear a consolidated action concerning multiple challenges to the ETS and is authorized to uphold or lift the Fifth Circuit Court of Appeals order.
Also, a number of state governments have considered legislation related to employer vaccine mandates during the pandemic. OSHA maintains that its ETS preempts these laws, but states such as the State of Florida disagree. On November 17, 2021, the Florida legislature passed legislation, which was signed into law on November 18, 2021 and codified at section 381.00317, Florida Statutes, prohibiting private-sector employers from implementing a COVID-19 vaccination mandate for full-time, part-time, or contract employees without providing at least five individual exemptions, including, but not limited to, pregnancy or anticipated pregnancy; religious reasons; COVID-19 immunity; periodic testing; and the use of employer-provided personal protective equipment. If an employer fails to comply with the new law and terminates an employee based on a COVID-19 vaccination mandate, then the employer will be subject to a fine of up to $50,000 per violation.
The Company plans to monitor conflicting guidance from the State of Florida and the federal government and adjust its policies in accordance with the resolution of the ongoing litigation in the federal courts.
Since the commencement of COVID-19 in March 2020, the Company took steps to allow and encourage greater separation for our employed and contracted field workers and has worked with its harvesters, haulers and suppliers to minimize interactions. For the continued protection of our employees and in accordance with the OSHA mandate, the Company intends to comply with all requirements as outlined in the ETS that was published on November 4, 2021, to the extent consistent with applicable law.
To date, the Company has experienced no material adverse impacts from this pandemic.
Prepayment and Restructure of Fixed-Rate Term Loans
In April 2021, the Company made a prepayment of $10,312,500 on the Met Fixed-Rate Term Loans and, effective May 1, 2021, the Company modified its Met Fixed-Rate Term Loans, which in the aggregate, after the prepayment, had a balance of $70,000,000 to be interest only with a balloon payment to be paid at maturity, which is November 1, 2029. As part of this modification, the interest rate on these Met Fixed-Rate Term Loans, which were bearing interest at 4.15%, has been adjusted to 3.85% and the Company will no longer have the prepayment option previously allowed under the arrangement.
Sales and Purchase of Land
On December 3, 2021, the State of Florida purchased, under the Florida Forever program, approximately 1,638 acres of the Alico Ranch for approximately $5,675,000 pursuant to an option agreement entered into on September 21, 2021 between the State of Florida and the Company.
On June 3, 2021, the Company sold approximately 11,700 acres, which were encumbered by an easement, to a third-party for approximately $12,219,000. In 2013, these acres were enrolled in the Wetlands Reserve Program (“WRP”), which calls for the restoration and maintenance of the property for the duration of the WRP easement. As part of that enrollment in 2013, Alico received approximately $1,800 per acre.
On April 15, 2021, the State of Florida purchased, under the Florida Forever program, approximately 5,734 acres of Alico Ranch for approximately $14,445,000, pursuant to an option agreement between the State of Florida and Alico dated December 15, 2020. This is the third sales transaction Alico has completed with the State of Florida within the last three years, aggregating over 22,000 acres. Alico used most of the net sales proceeds to prepay a portion of its fixed-rate term debt.
On October 30, 2020, the Company purchased approximately 3,280 gross acres located in Hendry County for a purchase price of $18,230,000. This acquisition allows the Company to add additional scale to its existing 45,000 gross acres of citrus properties. Strategically, with these acquired groves neighboring existing Alico groves, Alico believes that this acquisition will help Alico with its operation as a low-cost, high producing citrus grower.
28
Federal Relief Program
The Company was eligible for Hurricane Irma federal relief programs for block grants that were being administered through the State of Florida. During the fiscal years ended September 30, 2021, 2020, and 2019, the Company received approximately $4,299,000, $4,629,000, and $15,597,000, respectively, under the Florida Citrus Recovery Block Grant (“CRBG”) program. The remaining portion of the funds that are due to Alico under the Florida CRBG program relates to certain crop insurance expenses incurred by the Company, which is estimated to be approximately $2,000,000. In October 2021, the Company received its first portion of this crop insurance expense reimbursement in an amount equal to approximately $1,000,000 and expects to receive the remaining portion in fiscal year 2023.
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, 2021, 2020 and 2019:
(in thousands)
Fiscal Year Ended
Fiscal Year Ended
September 30,
Change
September 30,
Change
2021
2020
$
%
2020
2019
$
%
Operating revenues:
Alico Citrus
$
105,796
$
89,369
$
16,427
18.4
%
$
89,369
$
119,031
$
(29,662
)
(24.9
)%
Land Management and Other Operations
2,768
3,138
(370
)
(11.8
)%
3,138
3,220
(82
)
(2.5
)%
Total operating revenues
108,564
92,507
16,057
17.4
%
92,507
122,251
(29,744
)
(24.3
)%
Gross profit:
Alico Citrus
21,903
17,088
4,815
28.2
%
17,088
59,437
(42,349
)
(71.3
)%
Land Management and Other Operations
1,990
831
1,159
139.5
%
831
923
(92
)
(10.0
)%
Total gross profit
23,893
17,919
5,974
33.3
%
17,919
60,360
(42,441
)
(70.3
)%
General and administrative expenses
9,453
10,998
(1,545
)
(14.0
)%
10,998
15,146
(4,148
)
(27.4
)%
Income from operations
14,440
6,921
7,519
108.6
%
6,921
45,214
(38,293
)
(84.7
)%
Total other income, net
31,947
24,456
7,491
30.6
%
24,456
5,019
19,437
NM
Income before income taxes
46,387
31,377
15,010
47.8
%
31,377
50,233
(18,856
)
(37.5
)%
Income tax provision
11,567
7,663
3,904
50.9
%
7,663
12,783
(5,120
)
(40.1
)%
Net income
34,820
23,714
11,106
46.8
%
23,714
37,450
(13,736
)
(36.7
)%
Net loss (income) attributable to noncontrolling interests
39
(52
)
91
NM
(52
)
383
(435
)
NM
Net income attributable to Alico, Inc. common stockholders
$
34,859
$
23,662
$
11,197
47.3
%
$
23,662
$
37,833
$
(14,171
)
(37.5
)%
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, 2021, 2020 and 2019:
Fiscal Year Ended
September 30,
2021
2020
2019
Operating revenues:
Alico Citrus
97.5
%
96.6
%
97.4
%
Land Management and Other Operations
2.5
%
3.4
%
2.6
%
Total operating revenues
100.0
%
100.0
%
100.0
%
29
The following discussion provides an analysis of the Company's operating segments:
Alico Citrus
(in thousands, except per box and per pound solids data)
Fiscal Year Ended
Fiscal Year Ended
September 30,
Change
September 30,
Change
2021
2020
Unit
%
2020
2019
Unit
%
Operating Revenues:
Early and Mid-Season
$
31,525
$
31,303
$
222
0.7
%
$
31,303
$
39,574
$
(8,271
)
(20.9
)%
Valencias
55,918
50,060
5,858
11.7
%
50,060
73,480
(23,420
)
(31.9
)%
Fresh Fruit
608
2,321
(1,713
)
(73.8
)%
2,321
3,629
(1,308
)
(36.0
)%
Grove Management Services
16,983
4,599
12,384
NM
4,599
1,342
3,257
NM
Purchase and Resale of Fruit
623
850
(227
)
(26.7
)%
850
943
(93
)
(9.9
)%
Other
139
236
(97
)
(41.1
)%
236
63
173
NM
Total
$
105,796
$
89,369
$
16,427
18.4
%
$
89,369
$
119,031
$
(29,662
)
(24.9
)%
Boxes Harvested:
Early and Mid-Season
2,519
3,146
(627
)
(19.9
)%
3,146
3,114
32
1.0
%
Valencias
3,779
4,165
(386
)
(9.3
)%
4,165
4,790
(625
)
(13.0
)%
Total Processed
6,298
7,311
(1,013
)
(13.9
)%
7,311
7,904
(593
)
(7.5
)%
Fresh Fruit
61
267
(206
)
(77.2
)%
267
210
57
27.1
%
Total
6,359
7,578
(1,219
)
(16.1
)%
7,578
8,114
(536
)
(6.6
)%
Pound Solids Produced:
Early and Mid- Season
13,598
17,947
(4,349
)
(24.2
)%
17,947
16,873
1,074
6.4
%
Valencias
22,042
25,631
(3,589
)
(14.0
)%
25,631
29,854
(4,223
)
(14.1
)%
Total
35,640
43,578
(7,938
)
(18.2
)%
43,578
46,727
(3,149
)
(6.7
)%
Pound Solids per Box:
Early and Mid-Season
5.40
5.70
(0.30
)
(5.3
)%
5.70
5.42
0.28
5.2
%
Valencias
5.83
6.15
(0.32
)
(5.2
)%
6.15
6.23
(0.08
)
(1.3
)%
Price per Pound Solids:
Early and Mid-Season
$
2.32
$
1.74
$
0.58
33.3
%
$
1.74
$
2.35
$
(0.61
)
(26.0
)%
Valencias
$
2.54
$
1.95
$
0.59
30.3
%
$
1.95
$
2.46
$
(0.51
)
(20.7
)%
Price per Box:
Fresh Fruit
$
9.97
$
8.69
$
1.28
14.7
%
$
8.69
$
17.28
$
(8.59
)
(49.7
)%
Operating Expenses:
Cost of Sales
$
55,660
$
52,492
$
3,168
6.0
%
$
52,492
$
52,037
$
455
0.9
%
Harvesting and Hauling
16,922
19,897
(2,975
)
(15.0
)%
19,897
22,079
(2,182
)
(9.9
)%
Grove Management Services
15,084
3,817
11,267
NM
3,817
774
3,043
NM
Purchase and Resale of Fruit
526
704
(178
)
(25.3
)%
704
788
(84
)
(10.7
)%
Other
(4,299
)
(4,629
)
330
(7.1
)%
(4,629
)
(16,084
)
11,455
(71.2
)%
Total
$
83,893
$
72,281
$
11,612
16.1
%
$
72,281
$
59,594
$
12,687
21.3
%
Gross Profit
$
21,903
$
17,088
$
4,815
28.2
%
$
17,088
$
59,437
$
(42,349
)
(71.3
)%
NM - Not meaningful
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.
30
The Company sells its Early and Mid-Season and Valencia oranges to processors that convert the majority of the citrus crop into orange juice. The processors generally buy the citrus crop on a pound solids basis, which is the measure of the soluble solids (sugars and acids) contained in one box of fruit. The Company’s fresh fruit is generally sold to packing houses that purchase the citrus on a per box basis. The Company also provides citrus grove caretaking and harvest and haul management services to third parties from which revenues are generated , including a management fee. Other revenues consist of the purchase and reselling of fruit.
Alico's operating expenses consist primarily of cost of sales, harvesting and hauling costs and grove management service costs. Cost of sales represents the cost of maintaining the citrus groves for the preceding calendar year and does not vary in relation to production. Harvesting and hauling costs represent the costs of bringing citrus product to processors and varies based upon the number of boxes produced. Grove management services include those costs associated with citrus grove caretaking and harvest and haul management services provided to third parties. Other expenses include the period costs of reselling of third-party fruit.
The increase in revenue for the fiscal year ended September 30, 2021, compared to the fiscal year ended September 30, 2020 was primarily due to an increase in the revenue generated from grove management services and the Valencia fruit harvested.
On July 16, 2020, the Company executed an agreement with an affiliated group of third parties to provide citrus grove caretaking and harvest and haul management services for approximately 7,000 acres owned by such third parties. Under the terms of this agreement, the Company is reimbursed by the third parties for all its costs incurred related to providing these services and receives a management fee based on acres covered under this agreement. The Company records both an increase in revenues and expenses as and when the Company provides these citrus grove caretaking management services. For the fiscal year ended September 30, 2021, under this agreement, the Company recorded approximately $15,752,000 of operating revenue relating to these grove management services, including the management fee, as compared to approximately $3,311,000 in the fiscal year ended September 30, 2020.
The increase from the Valencia fruit harvest was driven by an increase in the market price per pound solids as compared to the prior year. The increase in the price per pound solids was due to increased consumption of Not-from-Concentrate Orange Juice (“NFC”) as well as tighter supplies of citrus fruit from Florida, Brazil and Mexico, which, in turn, led to reduced inventory levels. Largely offsetting this increase in pricing was the effect of fewer Valencia boxes being harvested and lower pound solids per box for the fiscal year ended September 30, 2021, compared to the fiscal year ended September 30, 2020. The Company, along with the Florida industry in general, recorded a smaller number of boxes harvested as a result of greater fruit drop rate during the current harvest season as compared to the previous year. In addition, the internal quality of the fruit was not as strong as in the previous year resulting in lower pound solids per box.
The decrease in revenue for the fiscal year ended September 30, 2020, when compared to the fiscal year ended September 30, 2019, was due to a decrease in the price per pound solids as well as a decrease in aggregate processed box production. The decrease in the price per pound solids in the market-place was a result of excess supply from domestic and international growers. The decrease in aggregate processed box production was the result of greater fruit drop and smaller fruit size of Valencias in the then-current harvest season as compared to the prior harvest season, offset in part by an increase in processed box production of the Early and Mid-season fruit.
The Company completed its harvest season in early May 2021 and was able to complete the harvest without any negative impact from the COVID-19 pandemic.
Total processed boxes harvested in fiscal year 2021 decreased by approximately 13.9%, as compared to fiscal year 2020. Pound solids decreased by approximately 24.2% for the Early and Mid-Season crop and decreased by approximately 14.0% for the Valencia crop. The combination of these items resulted in approximately 7,938,000 fewer pound solids sold in fiscal year 2021, as compared to fiscal year 2020.
Total processed boxes harvested in fiscal year 2020 decreased by approximately 7.5%, as compared to fiscal year 2019. Pound solids increased by approximately 6.4% and decreased by approximately 14.1% for the Early and Mid-Season and Valencia oranges, respectively. The combination of these items resulted in approximately 3,149,000 fewer pound solids sold in fiscal year 2020, as compared to fiscal year 2019.
The USDA, in its October 12, 2021 Citrus Crop Forecast for the 2021-22 harvest season, indicated its expectation that the Florida orange crop will decrease from approximately 52,800,000 boxes for the 2020-21 crop year to approximately 47,000,000 boxes for the 2021-22 crop year, a decrease of approximately 11.0%. While the USDA box production is estimated to be lower than in the prior year, the Company anticipates that market prices will remain consistent with or slightly above the 2020-21 harvest season market price levels, which is being driven by continued strong demand for NFC orange juice, along with anticipated declines in both Brazil and Florida box production.
The increase in operating expenses for the fiscal year 2021, as compared to the fiscal year 2020, primarily relates to grove management services it provides to third parties. As mentioned above, the Company executed an agreement with an affiliated group of third parties to provide citrus grove caretaking and harvest and haul management services for approximately 7,000 acres owned by such third parties. Under this agreement, for the fiscal years ended September 30, 2021 and 2020, the Company recorded approximately $14,342,000 and $3,016,000, respectively, of operating expenses relating to these grove management services. Additionally, the increase in operating expenses is attributable to the Company
31
purchasing additional citrus acres in May and October 2020, which resulted in cost of sales relating to these groves in the current fiscal year. Partially offsetting these increases was a reduction in harvest and haul expenses attributable to a decrease in Early and Mid-season and Valencia boxes harvested.
The increase in operating expenses for the fiscal year 2020, as compared to the fiscal year 2019, primarily relates to the Company receiving less federal relief proceeds through the Florida CRBG program relating to Hurricane Irma, which are recorded as a reduction of operating expenses, during fiscal year 2020, as compared to fiscal year 2019. The Company received proceeds of approximately $4,629,000 and $15,597,000 through the Florida CRBG program relating to Hurricane Irma during the fiscal years ended September 30, 2020 and 2019, respectively. Additionally, the Company recorded additional grove management services expense of approximately $3,016,000. Partially offsetting this increase in operating expenses was a reduction in harvesting and hauling costs experienced by the Company as a result of fewer processed boxes being harvested during the fiscal year ended September 30, 2020 as compared to the same period in the prior year.
As a result of a lower gross profit percentage generated from grove caretaking management services, as compared to citrus sales generated from groves, the overall gross profit percentage within the Alico Citrus segment was lower in fiscal year 2021 and 2020 and is expected to be lower in future fiscal years than prior fiscal years due to the execution of the above-mentioned new caretaking services agreement.
The credit amounts shown in “Other” in operating expenses above, for the most part, represent federal relief proceeds received under the CRBG program for the fiscal years ended September 30, 2021, 2020, and 2019.
Land Management and Other Operations
The table below presents key operating measures for the fiscal years ended September 30, 2021, 2020 and 2019:
(in thousands)
Fiscal Year Ended
Fiscal Year Ended
September 30,
Change
September 30,
Change
2021
2020
$
%
2020
2019
$
%
Revenue From:
Land and other leasing
$
2,404
$
2,683
$
(279
)
(10.4
)%
$
2,683
$
2,787
$
(104
)
(3.7
)%
Other
364
455
(91
)
(20.0
)%
455
433
22
5.1
%
Total
$
2,768
$
3,138
$
(370
)
(11.8
)%
$
3,138
$
3,220
$
(82
)
(2.5
)%
Operating Expenses:
Land and other leasing
$
762
$
955
$
(193
)
(20.2
)%
$
955
$
1,047
$
(92
)
(8.8
)%
Water conservation
—
1,346
(1,346
)
(100.0
)%
1,346
1,206
140
11.6
%
Other
16
6
10
166.7
%
6
44
(38
)
(86.4
)%
Total
$
778
$
2,307
$
(1,529
)
(66.3
)%
$
2,307
$
2,297
$
10
0.4
%
Gross Profit
$
1,990
$
831
$
1,159
139.5
%
$
831
$
923
$
(92
)
(10.0
)%
Land and other leasing include lease income from leases for grazing rights, hunting leases, a farm lease, a lease to a third party of an aggregate mine, leases of oil extraction rights to third parties, and other miscellaneous income.
The decrease in revenues from Land Management and Other Operations for the fiscal year ended September 30, 2021, compared to the fiscal year ended September 30, 2020, was primarily due to a reduction in the leased acreage relating to grazing and hunting leases. The reduction in the leased acreage was due to the sale of certain acres, which were previously included under these lease arrangements, thus resulting in fewer acres now being leased under these grazing and hunting leases.
The decrease in operating expenses from Land Management and Other Operations for the fiscal year ended September 30, 2021, compared to the fiscal year ended September 30, 2020, was primarily due to the Company no longer pursuing its dispersed water storage project and, therefore, incurring no water conservation expenses for the fiscal year ended September 30, 2021. On September 10, 2020, the Company sold approximately 10,700 acres on the western part of Alico Ranch to the State of Florida. Since the acres involved in the sale would have been critical to its planned dispersed water storage project, the Company decided to no longer pursue the related permit approval activities. Accordingly, the Company anticipates it will have no future expenses incurred relating to the dispersed water storage project. Additionally, the Company has seen a decrease in ad valorem taxes due to certain ranch land sales.
32
The slight decrease in revenues from Land Management and Other Operations for the fiscal year ended September 30, 2020 , compared to the fiscal year ended September 30, 20 19, was primarily due to a reduction in the leased acreage relating to a cattle grazing lease.
Upon the Company selling approximately 10,700 acres on the western part of Alico Ranch to the State of Florida, as mentioned above, and deciding to no longer pursue permit approval activities for this particular project, the Company wrote-down approximately $598,000 of assets relating to this project during the fourth quarter of the fiscal year ended September 30, 2020.
General and Administrative
General and administrative expenses for the fiscal year ended September 30, 2021 were approximately $9,453,000, compared to approximately $10,998,000 for the fiscal year ended September 30, 2020.
The decrease in general and administrative expenses for the fiscal year ended September 30, 2021, as compared to the fiscal year ended September 30, 2020, was attributable to (i) a reduction in legal expense of approximately $805,000, primarily resulting from the receipt of insurance proceeds for the reimbursement of legal fees in the amount of approximately $658,000 during the fiscal year ended September 30, 2021 relating to corporate legal matters, (ii) a reduction in stock compensation expense of approximately $241,000 in light of the fact that in the prior fiscal year, in January 2020 certain stock options had vested, which in turn resulted in an acceleration of expense in that prior fiscal year, (iii) a reduction in payroll expenses for the fiscal year ended September 30, 2021 of approximately $259,000 relating to the resignation of a senior manager in December 2019 and the reduction in other administrative personnel made during fiscal year ended September 30, 2021 and (iv) a reduction in pension expense related to the Company’s deferred retirement benefit plan of approximately $207,000 as a result of the Company terminating such plan and paying out each of the plan participants in August 2020. Partially offsetting this decrease was the Company’s incurring of approximately $200,000 in corporate advisory fees in the fiscal year ended September 30, 2021.
General and administrative expenses for the fiscal year ended September 30, 2020 were approximately $10,998,000, compared to approximately $15,146,000 for the fiscal year ended September 30, 2019.
The decrease in general and administrative expenses for the fiscal year ended September 30, 2020, as compared to the fiscal year ended September 30, 2019, was primarily due to professional fees, relating to a corporate litigation matter, of approximately $2,300,000 being incurred for the fiscal year ended September 30, 2019. This litigation was settled, and no further expenses were incurred relating to this matter during the fiscal year ended September 30, 2020. 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 experienced a reduction due to (i) a one-time pension expense related to its deferred retirement benefit plan of approximately $965,000 in fiscal year 2019, (ii) a reduction in payroll expenses for the fiscal year ended September 30, 2020 of approximately $331,000 relating to one of the senior managers resigning in December 2019 and a reduction in bonuses granted to senior management, (iii) a decrease in stock compensation expense of approximately $204,000 as a result of certain stock options expense being accelerated in fiscal year ended September 30, 2020 and (iv) other smaller decreases in rent, consulting and Board of Director fees aggregating approximately $445,000. Partially offsetting these decreases was a lower amount of stock compensation expense of $823,000 recognized in fiscal year ended September 30, 2019 as a result of a former senior executive forfeiting his stock options as part of the settled litigation and an increase in Directors and Officers insurance of approximately $247,000.
Other Income, net
Other income, net, for the fiscal years ended September 30, 2021 and 2020 was approximately $31,947,000 and approximately $24,456,000, respectively. The increase in other income, net was primarily due to the Company recognizing significant gains on sales of real estate, property and equipment and assets held for sale in both fiscal years. For the fiscal year ended September 30, 2021, the Company recorded gains on sale of real estate, property and equipment and assets held for sale of approximately $35,898,000 relating primarily to the sale of approximately 19,776 acres from the Alico Ranch to several third parties. For the fiscal year ended September 30, 2020, the Company recognized a gain on sale of real estate, property and equipment and assets held for sale of approximately $30,424,000. Additionally, a decrease in interest expense of approximately $1,994,000 for the fiscal year ended September 30, 2021, as compared to the fiscal year ended September 30, 2020, was primarily due to the reduction of the Company’s long-term debt from the making of mandatory principal payments and certain prepayments. In addition, the Company maintained lower balances on both its working capital line of credit and revolving line of credit, which also resulted in reduced interest expense.
Other income, net, for the fiscal years ended September 30, 2020 and 2019 was approximately $24,456,000 and approximately $5,019,000, respectively. The increase in other income, net was primarily due to the Company recording a higher gain on sale of real estate, property and equipment and assets held for sale in fiscal year 2020, as compared to fiscal year 2019. In fiscal year 2020, the Company recorded a gain of approximately $30,424,000, which was generated primarily from the sale of land on its West Ranch in September 2020 to the State of Florida. For the fiscal year ended September 30, 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. Additionally, the Company recognized a reduction of approximately $1,199,000 in interest expense in fiscal year 2020 as a result of (i) the reduction of its long-term debt attributable to making its mandatory principal payments, (ii) the Company prepaying approximately $4,455,000 on its debt obligations and (iii) a reduction in interest rates.
33
Income Taxes
For the fiscal years ended September 30, 2021, 2020 and 2019, the provision for income taxes was approximately $11,567,000, $7,663,000 and $12,783,000, respectively, and the related effective income tax rates were approximately 24.94%, 24.42% and 25.45%, respectively. The increase in the dollar amount of the tax provision for the fiscal year ended September 30, 2021 is the result of the Company generating greater net income during the current fiscal year as compared to the prior fiscal year. The decrease in the dollar amount of the tax provision for the fiscal year ended September 30, 2020 was the result of the Company generating less net income during fiscal year 2020, as compared to the prior fiscal year.
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.
Liquidity and Capital Resources
A comparative balance sheet summary is presented in the following table:
(in thousands)
September 30,
2021
2020
Change
Cash and cash equivalents and restricted cash
$
886
$
19,687
$
(18,801
)
Total current assets
$
54,913
$
51,899
$
3,014
Total current liabilities
$
22,306
$
21,158
$
1,148
Working capital
$
32,607
$
30,741
$
1,866
Total assets
$
433,217
$
423,937
$
9,280
Principal amount of term loans and lines of credit
$
126,294
$
151,983
$
(25,689
)
Current ratio
2.46 to 1
2.45 to 1
Sources and Uses of Liquidity and Capital
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, debt service costs including interest and principal payments on term loans and other credit facilities and acquisitions.
Management believes that a combination of cash-on-hand, cash generated from operations, 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.
Borrowing Facilities and Long-term Debt
Alico has a $70,000,000 working capital line of credit, of which approximately $69,664,000 is available for general use as of September 30, 2021, and a $25,000,000 revolving line of credit, all of which is available for general use as of September 30, 2021 (see Note 6. “Long-Term Debt and Lines of Credit" to the accompanying Consolidated Financial Statements). Additionally, effective May 1, 2021, the Company converted its Met Fixed-Rate Term Loans into interest bearing only loans with a balloon payment of the balance due at maturity, which is November 1, 2029. Such conversion has increased available cash and can be expected to continue to increase the available cash for the foreseeable future. With the increase in available cash, the Company could utilize the available cash for other possible uses such as paying down indebtedness, citrus grove acquisitions, share repurchases, and additional increased dividends. If the Company chooses to pursue significant growth and other corporate opportunities, such as the transaction whereby it acquired 3,280 citrus grove acres on October 30, 2020 for $18,230,000, pay down of
34
indebtedness, engag ing in share repurchases or pay ing increased dividends, these actions could have a material adverse impact on its cash balances and may require the Company to finance such activities by drawing down on 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 adversely 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.
Alico debt covenants under its credit facilities 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 $169,730,000 applicable for the year ended September 30, 2021, (iii) minimum current ratio of 1.50 to 1.00, (iv) debt to total assets ratio not greater than .625 to 1.00, and, (v) solely in the case of the WCLC, a limit on capital expenditures of $30,000,000 per fiscal year. As of September 30, 2021, the Company was in compliance with all of the financial covenants.
Cash Management Impacts
Cash and cash equivalents and restricted cash decreased from approximately $19,687,000 as of September 30, 2020 to approximately $886,000 as of September 30, 2021. Cash and cash equivalents and restricted cash decreased from approximately $23,838,000 as of September 30, 2019 to approximately $19,687,000 as of September 30, 2020. The components of these changes are discussed below.
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, 2021, 2020 and 2019:
(in thousands)
Fiscal Year Ended September 30,
2021
2020
2019
Net cash provided by operating activities
$
16,504
$
1,049
$
48,832
Net cash (used in) provided by investing activities
(3,268
)
9,489
(4,960
)
Net cash used in financing activities
(32,037
)
(14,689
)
(52,294
)
Net decrease in cash and cash equivalents and restricted cash
$
(18,801
)
$
(4,151
)
$
(8,422
)
35
Net Cash Provided By Operating Activities
(in thousands)
Fiscal Year Ended
September 30,
Fiscal Year Ended
September 30,
2021
2020
Change
2020
2019
Change
Net income
$
34,820
$
23,714
$
11,106
$
23,714
$
37,450
$
(13,736
)
Depreciation, depletion and amortization
15,122
14,282
840
14,282
13,603
679
Debt issue costs expense
179
238
(59
)
238
321
(83
)
Deferred income tax expense
2,249
7,603
(5,354
)
7,603
3,267
4,336
Cash surrender value
(14
)
(10
)
(4
)
(10
)
11
(21
)
Deferred retirement benefits
—
(5,226
)
5,226
(5,226
)
829
(6,055
)
Gain on sale of real estate, property and equipment and assets held for sale
(35,898
)
(30,424
)
(5,474
)
(30,424
)
(13,166
)
(17,258
)
Inventory net realizable value adjustment
—
—
—
—
808
(808
)
Loss on disposal of property and equipment
2,338
1,382
956
1,382
244
1,138
Change in fair value of derivatives
—
—
—
—
989
(989
)
Impairment of long-lived assets
—
598
(598
)
598
152
446
Impairment of right-of-use asset
—
87
(87
)
87
—
87
Insurance proceeds received for damage to property and equipment
(103
)
—
(103
)
—
(486
)
486
Stock-based compensation expense
1,230
1,306
(76
)
1,306
824
482
Change in working capital
(3,419
)
(12,501
)
9,082
(12,501
)
3,986
(16,487
)
Net cash provided by operating activities
$
16,504
$
1,049
$
15,455
$
1,049
$
48,832
$
(47,783
)
The increase in net cash provided by operating activities for the fiscal year ended September 30, 2021, as compared to the fiscal year ended September 30, 2020, was primarily due to an increase in net income and an increase in working capital which was primarily driven by an increase in accounts payable and timing of income tax payments. The increase in accounts payable relates to the timing and billing of fertilizer and chemical applications in the citrus groves. Offsetting a significant portion of this increase was the amount of gain on sale of real estate, property and equipment and assets held for sale being greater in the fiscal year ended September 30, 2021 as compared to the prior year, primarily resulting from a greater number of acres being sold in the current fiscal year.
The decrease in net cash provided by operating activities for the fiscal year ended September 30, 2020, as compared to the same period in fiscal year 2019, was primarily due to (i) an increase in gain on sale of real estate, property and equipment and assets held for sale in the fiscal year ended September 30, 2020, relating to the sale of certain sections of the West Ranch, (ii) a decrease in net income, which was primarily driven by decreased citrus sales, (iii) a decrease in the deferred retirement benefit as a result of the Company terminating its pension plan and paying all participants on August 30, 2020 and (iv) a decrease in working capital as a result of the payment of income taxes and an increase in accounts receivable related to the Company’s grove management services whereby the Company pays all growing costs and then is reimbursed in the future from proceeds of fruit sales of the third-party.
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.
36
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, 2021, 2020 and 2019:
(in thousands)
Fiscal Year Ended
September 30,
Fiscal Year Ended
September 30,
2021
2020
Change
2020
2019
Change
Purchases of property and equipment
$
(22,258
)
$
(18,785
)
$
(3,473
)
$
(18,785
)
$
(18,050
)
$
(735
)
Purchases of citrus groves
(18,527
)
(2,920
)
(15,607
)
(2,920
)
(1,950
)
(970
)
Net proceeds from sale of real estate, property and equipment and assets held for sale
37,266
31,541
5,725
31,541
14,602
16,939
Insurance proceeds received for damage to property and equipment
103
—
103
—
486
(486
)
Change in deposits on purchase of citrus trees
217
(458
)
675
(458
)
(108
)
(350
)
Advances on notes receivables, net
371
136
235
136
60
76
Purchases of mineral rights
(453
)
—
(453
)
—
—
—
Other
13
(25
)
38
(25
)
—
(25
)
Net cash (used in) provided by investing activities
$
(3,268
)
$
9,489
$
(12,757
)
$
9,489
$
(4,960
)
$
14,449
The shift from net cash provided by investing activities for the fiscal year ended September 30, 2020 to net cash used in investing activities for the fiscal year ended September 30, 2021 was primarily due to the use of funds to purchase approximately 3,280 gross acres located in Hendry County for a purchase price of approximately $18,230,000 in October 2020 and the acquisition of additional smaller citrus groves. Partially offsetting this shift was net proceeds received for the sale of real estate, property and equipment and assets held for sale being greater in the fiscal year ended September 30, 2021 as compared to the same period in the prior year (see Note 4. “Assets Held for Sale” and Note 5. “Property & Equipment, Net” to the accompanying Consolidated Financial Statements), including the Company’s receipt of approximately $5,725,000 more proceeds from the sale of ranch land to various third parties than the proceeds received in the fiscal year ended September 30, 2020.
The shift from net cash used in investing activities for the fiscal year ended September 30, 2019 to net cash provided by investing activities for the fiscal year ended September 30, 2020 was primarily due to an increase in proceeds received on the sale of certain assets sold during fiscal year 2020, as compared to fiscal year 2019. This is due to the Company divesting of more acres of land in fiscal year 2020, 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).
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, 2021, 2020 and 2019:
(in thousands)
Fiscal Year Ended
September 30,
Fiscal Year Ended
September 30,
2021
2020
Change
2020
2019
Change
Repayments on revolving lines of credit
$
(50,735
)
$
(114,581
)
$
63,846
$
(114,581
)
$
(89,231
)
$
(25,350
)
Borrowings on revolving lines of credit
47,793
117,523
(69,730
)
117,523
86,546
30,977
Principal payments on term loans
(21,957
)
(15,198
)
(6,759
)
(15,198
)
(10,900
)
(4,298
)
Treasury stock purchases
—
(238
)
238
(238
)
(25,576
)
25,338
Payment on termination of sugarcane agreement
—
—
—
—
(11,300
)
11,300
Dividends paid
(7,138
)
(2,466
)
(4,672
)
(2,466
)
(1,833
)
(633
)
Deferred financing costs
—
(23
)
23
(23
)
—
(23
)
Capital contribution received from noncontrolling interest
—
294
(294
)
294
—
294
Net cash used in financing activities
$
(32,037
)
$
(14,689
)
$
(17,348
)
$
(14,689
)
$
(52,294
)
$
37,605
The increase in net cash used in financing activities for the fiscal year ended September 30, 2021, as compared to the fiscal year ended September 30, 2020, was primarily due to the Company paying down a greater amount on its long-term debt during the fiscal year ended September 30, 2021, as compared to the prior year. During fiscal year ended September 30, 2021, the Company prepaid approximately $10,312,000 of principal on its fixed rate term loans with MetLife and also paid approximately $4,070,000 of principal on one of its loans
37
outstanding with Prudential which matured in September 2021. Partially offsetting these increased payments was the conversion of the Company’s Met Fixed-Rate Term Loans into interest bearing only loans with a balloon payment of the balance due on November 1, 2029. Additionally, the Company paid a greater amount of dividends to stockholders of the Company’s common stock during the current fiscal year, as compared to the prior year, as a result of the Company increasing its annual dividend to $2.00 per common share in June 2021. The Company also paid down, net of borrowings, its revolving line of credit during the current fiscal year.
The decrease in net cash used in financing activities for the fiscal year ended September 30, 2020, as compared to the fiscal year ended September 30, 2019, was primarily due to the Company repurchasing its common shares through a tender offer in October 2018 for an aggregate approximate amount of $25,576,000 and the termination of its 2014 Post-Closing Agreement in March 2019 pursuant to which the Company paid $11,300,000. Partially offsetting this shift was a prepayment of one of its long-term debt obligations in November 2019 in the amount of $4,455,000.
Alico had $0 outstanding on its revolving lines of credit as of September 30, 2021 and approximately $94,664,000 remaining availability.
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, 2021, there was approximately $336,000 in outstanding letters of credit, which correspondingly reduced Alico's availability under the line of credit.
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, 2021 and the future periods in which such obligations are expected to be settled in cash.
(in thousands)
Payments Due by Period
Total
<1 Year
1-3 Years
3-5 Years
5+ Years
Long-Term Debt
$
126,294
$
4,285
$
8,570
$
8,570
$
104,869
Interest on Long-Term Debt
30,176
4,281
8,182
7,676
10,037
Operating Leases
371
324
47
—
—
Tree Purchase Commitments
2,405
2,405
—
—
—
Total
$
159,246
$
11,295
$
16,799
$
16,246
$
114,906
Purchase Commitments
The Company enters into contracts for the purchase of citrus trees during the normal course of its business. As of September 30, 2021, the Company had approximately $2,405,000 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. We are exposed to the impact of inflation on our cost of products sold. We use a number of strategies to mitigate the effects of cost inflation including commodity hedging and pursuing cost productivity initiatives. We experienced higher inflation in 2021 and expect to experience increased inflation in 2022. Pricing actions and supply chain productivity initiatives introduced at the end of 2021 will mitigate a portion of this inflationary pressure, but we do not expect such benefits will fully offset the incremental costs in 2022.
Critical Accounting Policies and Estimates
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. Management considers an accounting estimate to be critical if it is made in accordance with generally accepted accounting principles, involves a significant level of estimation uncertainty, and has had or is reasonably likely to have a material impact on the Company’s financial condition or results of operations. Alico considers policies and estimates 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.
38
For grove management services, the Company recognizes operating revenue, including a management fee, when services are rendered and consumed. 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.
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.
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, 2021, 2020 and 2019, the Company did not record any valuation allowances. 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, 2021 and 2020, 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
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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 Supplementary Data" - Note 1. "Description of Business and Basis of Presentation" for additional information about the impact of accounting pronouncements.
Subsequent Events
On October 15, 2021 and November 5, 2021, the Company awarded 2,500 and 2,224 restricted shares of the Company’s common stock to certain executives and senior managers under the 2015 Plan at a weighted average fair value of $35.77 per common share, with 2,500 vesting on January 1, 2022 and the remaining shares vesting on January 1, 2023.
On December 2, 2021, the Board of Directors of the Company declared a cash dividend for the first quarter of fiscal year 2022 of $0.50 per share on its outstanding common stock to be paid to stockholders of record as of December 31, 2021, with payment expected on January 14, 2022.
On December 3, 2021, the State of Florida purchased, under the Florida Forever program, approximately 1,638 acres of the Alico Ranch for approximately $5,675,000 pursuant to an option agreement entered into on September 21, 2021 between the State of Florida and the Company.
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