Note 2. Basis of Presentation and Significant Accounting Policies

 

Principles of Consolidations

 

The audited consolidated financial statements include the accounts of Alico, Inc., and its wholly owned subsidiaries. The audited consolidated financial statements represent the consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders' equity and comprehensive income (loss) and consolidated statements of cash flows of Alico, Inc. and its wholly-owned subsidiaries. The Company's subsidiaries include: Alico Land Development, Inc. ("ALDI"), Agri-Insurance Company, Ltd. ("Agri-Insurance"), Alico-Agri, Ltd., Alico Plant World, LLC, Alico Fruit Company, LLC ("Alico Fruit")(formerly Bowen Brothers Fruit Company, LLC") and Alico Citrus Nursery, LLC. Agri-Insurance was liquidated in September 2010. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company considers the criteria established under FASB ASC 810, Consolidations in its consolidation process. These audited consolidated financial statements should be read in conjunction with the notes thereto included in this Annual Report.

 

Reclassifications

 

Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the fiscal year 2013 presentation. These reclassifications had no impact on working capital, net income, stockholders' equity or cash flows as previously reported.

 

The Company manages its land based upon its primary usage and reviews its performance based upon three primary classifications - Citrus Groves, Improved Farmland and Ranch and Conservation.  In addition, it operates an Agricultural Supply Chain Management business that is not tied directly to its land holdings and Other Operations that include leasing mines and oil extraction rights to third parties.  The Company presents its financial results and the related discussions based upon these five segments (Citrus Groves, Improved Farmland, Ranch and Conservation, Agricultural Supply Chain Management and Other Operations).  In the fourth quarter of fiscal year 2013, the Company changed its internal operations to align with the way it manages its business operations. As a result, the Company has realigned its financial reporting segments to match its internal operations.  The Company has reclassified prior years to conform to the fiscal year 2013 presentation.  None of these changes affect the Company's previously report consolidated results.  The primary change in previously reported segment results is to reclassify the former Land Leasing and Rentals segment's revenues and expenses to the related land classifications.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates based upon future events. The Company periodically evaluates the estimates. The estimates are based on current and expected economic conditions, historical experience and various other specific assumptions that the Company believes to be reasonable.

 

Revenue Recognition

 

Revenue from agricultural crops is recognized at the time the crop is harvested and delivered to the customer. 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 year to these estimates as more current relevant information regarding the specific markets become available. Differences between the estimates and the final realization of revenue can be significant and can be either positive or negative. During the periods presented in this report, no material adjustments were made to the reported revenues of Alico's crops.

 

Alico recognizes revenue from cattle sales at the time the cattle are delivered.

 

Alico Fruit's 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. Alico Fruit also purchases and resells citrus fruit; in these transactions, Alico Fruit (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, Alico Fruit recognizes revenue based on the gross amounts due from customers for its marketing activities. Supply chain management services revenues are recognized when the services are performed.

 

Cash and Cash Equivalents

 

Cash includes cash on hand, bank demand accounts and money market accounts having original maturities at acquisition date of 90 days or less. At various times throughout the year and at September 30, 2013, some deposits held at financial institutions were in excess of federally insured limits. The Company has not experienced any losses related to these balances and believes credit risk to be minimal.

 

Restricted cash

 

Restricted cash of $2,500,000 as of September 30, 2012 related to a deposit for a contract for the sale of land. Restricted cash is included in current assets based on the contractual term for the release of the restriction. The closing of the sale of the property was on October 3, 2012, and the cash was released from restricted cash to cash and equivalents at closing. See Note 7. Property, Buildings and Equipment, Net.

 

Accounts receivable

 

Accounts receivable are generated from the sale of citrus, sugarcane, cattle, leasing and other transactions. The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer's account.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company's financial instruments, including cash and cash equivalents, certificates of deposit, accounts receivable, mortgages and notes receivable, accounts payable and accrued expenses approximate their fair value because of the immediate or short term nature of these assets and liabilities. The carrying amounts of long-term debt approximates fair value because the transactions are with commercial lenders at interest rates that vary with market conditions and fixed rates that approximate market rates for similar obligations. See Note 3, Fair Value Measurements.

 

Major Customers

 

Since the inception of its sugarcane program in 1988, the Company has sold 100% of its product to United States Sugar Corporation ("USSC"), a local Florida sugar mill. Due to the location of the Company's sugarcane fields relative to the location of alternative processing plants, the loss of USSC as a customer would have a material adverse effect on the Company's sugarcane operations. Alico sold citrus products to USSC affiliate Southern Gardens during fiscal year 2011, however; the Company did not sell citrus products to them in fiscal years 2013 or 2012.

 

Revenues and receivables from the Company's major customers are as follows for the years ended September 30, 2013, 2012 and 2011:

 

(in thousands)		Accounts Receivable								Revenue												% of Total Revenue
		2013				2012				2013				2012				2011				2013				2012				2011
USSC		$	3,004			$	1,970			$	21,056			$	14,442			$	7,796				20.7	%			11.4	%			7.9	%
Southern Gardens		$	-			$	-			$	-			$	-			$	19,950				0.0	%			0.0	%			20.2	%
Florida Orange Marketers, Inc.		$	-			$	-			$	15,689			$	22,219			$	17,743				15.4	%			17.5	%			18.0	%
Citrosuco North America, Inc.		$	-			$	-			$	11,092			$	18,895			$	17,416				10.9	%			14.9	%			17.7	%
Louis Dreyfus		$	-			$	-			$	26,246			$	29,344			$	12,069				25.8	%			23.1	%			12.2	%
Cutrale Citrus Juice		$	-			$	-			$	6,300			$	13,156			$	3,507				6.2	%			10.3	%			3.6	%

 

 

Real Estate

 

In recognizing revenue from land sales, Alico applies specific sales recognition criteria to determine when land sales revenue 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 gain proportionate to collections utilizing either the installment method or deposit method as appropriate.

 

Investments

 

Investments are carried at their fair value. Net unrealized investment gains and losses that are considered to be temporary are recorded net of related deferred taxes in accumulated other comprehensive income in stockholders' equity until realized. Unrealized losses determined to be other than temporary are recognized in the Statement of Comprehensive Income in the period the determination is made. The cost of all investments is determined on the specific identification method.

 

Inventories

 

The costs of growing crops are capitalized into inventory throughout the Company's crop year. Such costs are expensed when the crops are harvested and are recorded in citrus groves management and improved farmland management operating expenses in the Statement of Comprehensive Income. Inventories are stated at the lower of cost or net realizable value. The cost for unharvested citrus and sugarcane crops is based on accumulated production costs incurred during the period from January 1 through the balance sheet date. The cost of the beef cattle inventory is based on the accumulated cost of developing such animals for sale from July 1 through the Balance Sheet date. See Note 5. Inventories.

 

Property, Buildings and Equipment

 

Property, buildings and equipment are stated at cost, net of accumulated depreciation or 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.

 

Costs related to the development of sugarcane are capitalized in a similar manner as citrus groves. However, sugarcane matures in one year and typically the Company will harvest an average of three crops (one per year) from one planting. As a result, cultivation and caretaking costs are expensed as the crop is harvested, while the development and planting costs are depreciated over three years.

 

The breeding herd consists of purchased animals and animals raised on the Company's ranch. Purchased animals are stated at the cost of acquisition. The cost of animals raised on the ranch is based on the accumulated cost of developing such animals for productive use.

 

Real estate costs incurred for the acquisition, development and construction of real estate projects are capitalized.

 

Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of depreciable assets.

 

The estimated useful life for property, buildings and equipment is as follows:

 

Breeding herd		6-7 years
Buildings		10-40 years
Citrus trees		25 years
Sugarcane plantings		3 years
Equipment and other facilities		3-20 years

 

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 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 assets might be impaired and the estimated cash flows (undiscounted and without interest charges) to be generated by those assets over the remaining lives of the assets are less than the carrying amounts of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimates of future market conditions and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. See Note 7. Property, Building and Equipment, Net for further discussion.

 

Investments, Deposits and Other Non-Current Assets

 

Investments, deposits and other non-current assets primarily include stock owned in agricultural cooperatives and loan origination fees. Investments in stock related to agricultural co-ops and deposits are carried at cost, as are deferred loan fees related to the issuance of bank facilities, net of amortization. The Company uses a cooperative to harvest its sugarcane. The cooperatives require members to acquire stock ownership as a condition for the use of its services.

 

Income Taxes

 

The Company follows the asset and liability method of accounting for deferred 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 tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted 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 tax rates on deferred 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 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. 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.

 

Earnings per Share

 

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period, including all potentially dilutive shares issuable under outstanding stock options and restricted stock unless the effect is anti-dilutive. There were no stock options outstanding at September 30, 2013, 2012 and 2011. Non-vested restricted shares entitle the holder to receive non-forfeitable dividends upon issuance and are included in the calculation of basic earnings per share.

 

The following table presents a reconciliation of basic to dilute weighted average shares outstanding for fiscal years ended September 30, 2013, 2012 and 2011:

 

(in thousands)	Fiscal Year Ended September 30,
	2013				2012				2011
Weighted Average Shares Outstanding - Basic		7,313				7,355				7,363
Unvested Restricted Stock Awards		44				-				-
Weighted Average Shares Outstanding - Diluted		7,357				7,355				7,363

 

 

Stock-Based Compensation

 

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is typically recognized as expense on a straight-line basis over the vesting period. Upon the vesting of restricted stock, the Company issues common stock from shares held in treasury.

 

The 2008 Incentive Equity Plan was approved by shareholders on February 20, 2009. It provided for the issuance of up to 350,000 shares to Directors and Officers through November 2013. Effective April 1, 2013, the Board of Directors adopted the 2013 Incentive Equity Plan (the "2013 Plan") which supersedes the 2008 Plan. The 2013 Plan was approved by shareholders at the February 22, 2013 shareholders meeting. Under the terms of the 2013 Plan, 350,000 shares of the Company's common stock may be awarded to recipients. Shares issued pursuant to awards under both the 2008 Plan and the 2013 Plan, if any, must be outstanding shares which have been repurchased by the Company.

 

Alico measures the cost of employee services on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant date fair value of employee share options and similar instruments are estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available).

 

The Company's incentive equity plans provide for grants to executives in various forms including restricted shares of the Company's common stock. 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.

 

Total stock-based compensation expense recognized on the Consolidated Statements of Operations for the three years ended September 30, 2013 in other operations and general and administrative expense was as follows:

 

(in thousands)	Fiscal Year Ended September 30,
	2013				2012				2011
Stock compensation expense:
Executives	$	81			$	(27	)		$	(19	)
Board of Directors		842				485				434
Total stock compensation expense	$	923			$	458			$	415

 

 

The Company is recognizing compensation cost equal to the fair value of the stock at the grant dates prorated over the vesting period of each award.

 

For the year ended September 30, 2013, the Company issued 25,584 shares to Directors under the 2008 and 2013 Plans at a weighted average fair value of $38.41 per share that vested immediately. Stock-based compensation expense recognized in the Consolidated Statement of Comprehensive Income in general and administrative expense was $923,000, $485,000 and $434,000 for the years ended September 30, 2013, 2012 and 2011. There are 334,126 shares eligible for grant under the 2013 Plan. There are 152,403 non-vested restricted shares awarded at September 30, 2013.

 

No stock options were granted in fiscal 2013, 2012 or 2011.

 

Variable Interest and Equity Method Investments

 

The Company evaluates the method of accounting for investments in which it does not hold an equity interest of at least 50% based on the amount of control it exercises over the operations of the investee, exposure to losses in excess of its investment, the ability to significantly influence the investee and whether Alico is the primary beneficiary of the investee. Investments not qualifying for consolidation are accounted for under the equity method whereby the ongoing investment in the entity, consisting of its initial investment adjusted for distributions, gains and losses of the entity are classified as a single line in the balance sheet and as a non-operating item in the income statement. The Company accounts for its investment in Magnolia in accordance with the equity method. See Note 6. Investment in Magnolia Fund.

 

Recent Accounting Pronouncement

 

Title		Prescribed Effective Date		Alico's Status		Commentary
Update No. 2013-11-Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)		1/1/2013 (Q2 2014)		Unadopted		The Company does not believe that adoption of the standard will have a material impact on its results of operations or financial position upon adoption.
Update 2013-02-Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income		1/1/2013 (Q2 2014)		Unadopted		The Company does not believe that adoption of the standard will have a material impact on its results of operations or financial position upon adoption.
Update 2013-01-Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities		10/1/2014 (Q1 2015)		Unadopted		The Company does not believe that adoption of the standard will have a material impact on its results of operations or financial position upon adoption.