Tejon Ranch Co. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Tejon Ranch is a California land development and agribusiness company with approximately 270,000 acres and four segments: commercial/industrial real estate, resort/residential real estate, mineral resources, and farming.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue and other income | $46.345 million | $48.444 million |
| Operating income | $1.176 million | $3.128 million |
| Income before tax | $6.189 million | $7.006 million |
| Net income attributable to common stockholders | $4.165 million | $4.441 million |
| Diluted earnings per share | $0.20 | $0.22 |
| Cash from operating activities | $9.536 million | $14.092 million |
- Revenue declined about 4%; common-stockholder net income declined about 6%. Operating income margin was approximately 2.5%, versus 6.5% in 2012.
- Fourth-quarter revenue was $13.216 million, compared with $13.904 million in fourth-quarter 2012. The company reported a fourth-quarter common-stockholder loss of $826,000, or $0.04 per diluted share, versus income of $27,000 in the prior-year quarter.
- Segment revenue and profit trends: commercial/industrial revenue was $11.148 million and segment loss was $1.754 million; resort/residential revenue was $1.266 million and segment loss was $2.085 million; mineral resources revenue was $10.242 million and segment profit was $9.780 million; farming revenue was $22.682 million and segment profit was $7.876 million. Segment profits exclude corporate expenses and other specified items.
- Mineral resources revenue fell 27%, mainly as oil production declined 29% and average oil price declined 3%. Farming revenue was nearly flat; higher almond revenue was offset by lower pistachio and grape revenue, while farming expenses increased 11%.
- Equity earnings from unconsolidated joint ventures rose to $4.006 million from $2.535 million, principally reflecting improved TA/Petro results. The 2013 effective income tax rate was approximately 31%, compared with 38% in 2012.
- At year-end, cash and marketable securities totaled $64.467 million; total assets were $342.879 million, and equity was $320.187 million. Debt was $4.693 million, with no balance drawn on the $30 million revolving credit facility. Debt was approximately 1.45% of total book capitalization.
- Investing activity used $7.611 million of cash. Capital expenditures were $21.558 million and long-term water asset investments were $9.635 million, partly offset by $17.809 million of East CFD infrastructure reimbursements and proceeds from marketable securities. Long-term water assets rose to $46.754 million.
Material changes, outlook, and risks
- Commercial/industrial segment profit improved year over year, supported by increased hunting revenue and Calpine percentage rent. The company was developing infrastructure at TRCC-East and expected the Outlets at Tejon to open in late summer 2014.
- Resort/residential losses narrowed, but Centennial and Grapevine remained in entitlement and planning stages. Tejon Mountain Village was fully entitled; development timing depends on economic conditions and the second-home market.
- Management expected 2014 investment needs to increase. Planned items included approximately $11.6 million of TRCC-East infrastructure, up to $14.2 million for Grapevine planning and entitlements, up to $12 million for joint ventures, approximately $4 million for water infrastructure and purchases, and approximately $2.5 million for equipment and information technology. These are plans or estimates, not guaranteed expenditures.
- In November 2013, the company acquired a contract to purchase 6,693 acre-feet of water annually through 2044, with an extension option. The approximately $18.7 million price was paid half in cash and half in company shares. Initial 2014 water cost is $656 per acre-foot, with future increases subject to a stated formula.
- California drought is a significant near-term risk: the preliminary 2014 State Water Project allocation was 0%. Management expected groundwater, surface water, and water-district resources to meet 2014 farming needs, while noting uncertainty and potential effects on crop yields and development.
- Other principal risks include lengthy or unsuccessful land-use approvals, environmental challenges and litigation, real estate and commodity-market cycles, oil and gas price/production volatility, crop-price and water-cost exposure, dependence on joint-venture partners, and potential financing needs for long-term development.
- Contingencies include Antelope Valley groundwater-rights litigation and water-bank litigation, whose potential outcomes and financial effects were not estimable. The company described the adverse outcome in the TMV title lawsuit as remote. National Cement-related environmental remediation is subject to tenant indemnities; no environmental liability was recorded. A state water-board case involving TA/Petro was settled in February 2014 with no material adverse impact expected for Tejon.
- The company distributed 3 million warrants to shareholders in 2013, each exercisable for one share at $40 through August 31, 2016, subject to possible early expiration. No cash dividends were paid in 2013 or 2012. CEO Gregory Bielli took office in December 2013.
Important facts for investors to verify
- Progress, costs, and approval timelines for Centennial and Grapevine, and the development plan and funding commitments for Tejon Mountain Village.
- Actual 2014 water availability, groundwater litigation outcomes, water-contract costs, and whether alternative supplies can support both farming and development.
- Oil production recovery and royalty trends, crop yields and final crop settlement prices, and exposure to customer concentration in farming and oil royalties.
- Realized spending and financing for TRCC-East, the outlet center, joint ventures, and water assets; compare with management’s stated 2014 investment plans.
- Liquidity and covenant headroom, including the $30 million revolving facility, contractual water payments, CFD special taxes, and the $5.426 million standby letter of credit.
- Changes in material litigation or environmental contingencies, and the effect of warrant exercises and share issuance on dilution.