Tejon Ranch Co. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Amounts below are in millions of dollars unless otherwise stated. Tejon Ranch is a diversified land-development and agribusiness company, with commercial/industrial real estate, resort/residential real estate, mineral resources, and farming segments.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $15.128 | $16.114 | $32.363 | $33.542 |
| Operating income | $1.745 | $4.002 | $3.002 | $3.112 |
| Net income attributable to common stockholders | $2.292 | $4.021 | $4.991 | $4.414 |
| Diluted earnings per share | $0.11 | $0.20 | $0.25 | $0.22 |
| Operating margin | 11.5% | 24.8% | 9.3% | 9.3% |
- Cash flow: Nine-month operating cash flow was $5.025, down from $11.486. Investing used $7.025, compared with $20.510 used in 2012; financing provided $3.863, versus $2.140 used.
- Liquidity: Cash and cash equivalents were $9.082; available-for-sale securities were $64.487. Together, cash and securities totaled $73.569, versus $72.268 at year-end 2012. Current assets were $95.443 and current liabilities $8.320.
- Debt and capital: Debt was $4.750, including $4.519 long-term debt net of current portion. The company reported a 1.5% debt-to-total-capitalization ratio. Its $30.0 revolving credit line had no borrowings at quarter-end; it was scheduled to mature in December 2013. The line is secured by a portion of farm acreage.
- Assets and equity: Total assets were $338.393 and total equity $312.995 at September 30, 2013. Investments in unconsolidated joint ventures were $62.000.
Changes versus the prior comparable period
- Third-quarter revenue fell 6%, operating income fell 56%, and common-stockholder net income fell 43%. The principal pressure was lower mineral-resource revenue, alongside higher farming costs related to harvest timing.
- For the first nine months, revenue declined 4%, but common-stockholder net income rose 13%. Management attributed the improvement mainly to higher equity earnings from joint ventures and lower operating expenses, including reversals of previously recognized stock-compensation expense.
- Nine-month mineral-resource revenue declined 28%, primarily from a 29% decrease in production due to well maintenance, production-facility expansion, and regulatory-permitting management; oil prices were also slightly lower year over year.
- Farming revenue rose 3% over nine months, with stronger almond revenue offset by lower pistachio and wine-grape revenue. High winds damaged crops; pistachio production was also in a down cycle. Commercial/industrial revenue rose 12%, while resort/residential revenue rose from a low comparison base.
- Equity in joint-venture earnings increased to $2.920 from $1.648 for the nine-month period, with improvement primarily from the TA/Petro venture.
Outlook, risks, contingencies, and unusual items
- Development plans: Construction began in Q2 on a 326,000-square-foot outlet center through the Rockefeller joint venture; completion was expected in late summer 2014. The company was pursuing tenant leases and continuing TRCC infrastructure work and Grapevine Development Area planning. Management estimated 2013 investment requirements could total approximately $22.0 million and said substantial future investment would be needed. No specific earnings guidance was provided.
- Water purchase after quarter-end: On November 6, 2013, the company completed an approximately $18.7 million purchase of a water agreement for 6,693 acre-feet annually. Consideration was half cash and half company shares. The agreement runs through 2044, with an option to extend 35 years; 2014 water cost is $656 per acre-foot, with annual increases based on the greater of CPI or 3%.
- Crop and market risks: Results are seasonal and depend on commodity prices, crop yields, weather, and water availability. Management said almond and pistachio prices were strong but future crop pricing depended on crop size and market conditions. At September 30, $7.764 million, or 72%, of receivables was exposed to changing crop prices.
- Water obligations and development financing: WRMWSD contracts require estimated minimum payments of $2.5 million annually through 2035, whether or not water is available or used, before potential credits. A $5.426 million standby letter of credit supports East CFD bond obligations; management believed it would not be drawn. The East CFD had approximately $80.25 million of additional bond debt authorized, which is not company debt.
- Legal and environmental matters: The company described ongoing Antelope Valley groundwater adjudication, water-bank litigation, and environmental monitoring/remediation obligations associated with leased National Cement property. Potential monetary exposure in some proceedings could not be estimated; management considered certain adverse outcomes remote or not expected to have a material impact. The Tejon Mountain Village land-title case had been dismissed with prejudice, but an appeal was pending.
- Unusual earnings item and potential dilution: Stock-compensation expense was reduced by reversals, including $2.271 million tied to the CEO’s announced retirement at year-end 2013 and $0.485 million after another executive’s departure. In August, the company distributed 3.0 million warrants, each exercisable for one share at $40 through August 31, 2016, subject to possible early expiration under specified conditions.
- The company said disclosure controls were effective and there were no material changes to internal control over financial reporting. It reported no material changes to the risk factors in its latest Form 10-K.
Investor verification priorities
- Confirm renewal or replacement of the $30 million credit facility scheduled to mature in December 2013, and assess the funding plan for development spending.
- Track outlet-center construction, tenant leasing, projected completion, and the joint venture’s financing and cost exposure.
- Monitor mineral production recovery and the effects of permitting and maintenance, as well as final crop yields, prices, and wind-damage impacts.
- Review the water agreement’s share issuance, annual price escalators, and integration with the company’s existing water assets and obligations.
- Assess potential dilution from the 3 million warrants and the effect of stock-compensation reversals on reported earnings comparisons.
- Follow the groundwater and water-bank litigation, environmental matters, and the contingent East CFD letter of credit.