The St. Joe Company — Q2 2011 Form 10-Q
Business context and period: Florida-based landowner and real estate developer with approximately 574,000 acres, primarily in Northwest Florida, plus resort and club properties. This unaudited report covers the three and six months ended June 30, 2011; comparisons are with 2010.
Financial performance and position
- Q2 revenue: $25.3 million, up 15% from $22.0 million. The company reported an operating loss of $20.6 million and a net loss attributable to the company of $13.3 million, or $0.14 per share, versus a $8.6 million net loss, or $0.09 per share, in Q2 2010.
- First-half revenue and earnings: Revenue was $98.7 million versus $35.3 million. Operating income was $0.8 million; net income attributable to the company was $0.8 million, or $0.01 per share, compared with a $20.0 million net loss, or $0.22 per share, in the prior-year period. The improvement chiefly reflects a timber deed transaction, not a broad-based recovery.
- Cash flow and liquidity: First-half operating cash flow was $26.7 million, versus cash used of $29.4 million in 2010. Cash and cash equivalents were $199.8 million at June 30, up from $183.8 million at year-end. Investing cash outflow was $6.0 million and financing cash outflow was $4.7 million.
- Debt and assets: Debt was $53.1 million, down from $54.7 million at year-end; total assets were $1.067 billion and total equity was $880.1 million. Debt includes $24.3 million of defeased non-recourse debt. The company terminated its $125 million revolving credit facility effective July 1, 2011, with no prepayment penalty. It reported compliance with the facility’s covenants at June 30.
- Margins and segments: The filing does not provide a single consolidated gross-margin measure. Q2 homesite and home sales gross margin was 21%, down from 36%; first-half margin was 22%, down from 30%. Residential real estate recorded a $6.3 million Q2 pretax loss; commercial real estate lost $2.9 million. Forestry reported $1.8 million Q2 pretax income.
Material changes versus prior period
- First-half timber sales reached $70.8 million, versus $14.2 million, primarily because of a March 2011 timber deed sale. The $55.9 million agreement covered harvesting rights on 40,975 acres for up to 20 years; $54.5 million of revenue was recognized in the first half, producing a stated $50.3 million pretax gain after $4.2 million of cost of sales and depletion. A further $1.4 million was recorded as imputed land lease revenue to be recognized over the deed’s term.
- Q2 resort and club revenue increased 20% to $13.0 million, attributed to higher rates and occupancy. Real estate sales increased, but management said residential demand remained weak and margins fell as the sales mix shifted toward residential properties.
- First-half corporate expense rose 96% to $26.5 million, including higher legal fees and accelerated stock compensation. Restructuring charges were $10.4 million for the first half, including agreements with the former CEO and other senior executives; impairment losses were $2.5 million.
Outlook, commentary, and risks
- Management said it saw somewhat improved residential activity and renewed commercial interest, but did not expect significant improvement in market conditions during the remainder of 2011. It expected the new wood-fiber supply agreement to support slightly higher timber revenue year over year in the rest of 2011.
- The new management team expects cost-saving efforts to reduce operating and corporate expenses by approximately $15 million to $18 million annually. Management believes cash and anticipated cash flows are sufficient for currently expected working capital needs and capital expenditures; this is forward-looking and not a guarantee.
- Key exposures include prolonged weakness in Florida real estate, potential property impairments, the Deepwater Horizon spill’s impact on the region, and dependence on the Panama City mill as a major timber customer. The company also faces securities class-action and shareholder derivative litigation, an SEC private investigation covering impairment accounting and other matters, environmental proceedings, and uncertain potential recovery from oil-spill litigation.
- Other contingencies include a $0.8 million standby guarantee liability relating to Southwest Airlines service at the regional airport, $28.7 million of surety bonds, and $0.8 million of standby letters of credit. Environmental accruals were $1.6 million; management said certain rehabilitation costs could not yet be quantified.
Important facts for investors to verify
- Whether the first-half earnings and operating cash flow are sustainable without the timber deed’s large, nonrecurring contribution.
- Current real estate sales volumes, pricing, inventory values, and the assumptions underlying impairment assessments.
- Actual realized savings against management’s $15 million to $18 million annualized cost-reduction expectation, including restructuring and legal costs.
- Developments and potential financial impact of the SEC investigation, shareholder litigation, environmental matters, and Deepwater Horizon claims.
- Liquidity and financing plans following termination of the revolving credit facility, and the cash and maturity profile of the remaining debt.