TEJON RANCH CO quarterly report, Q2 FY2012

Tejon Ranch Co. — Q2 2012 Form 10-Q

Reporting period: Three and six months ended June 30, 2012. Tejon Ranch is a diversified land-development and agribusiness company, reporting commercial/industrial real estate, resort/residential real estate, and farming. Results are seasonal and affected by the timing of land transactions and crop sales.

Financial results and position

Metric	Q2 2012	Six months 2012	Comparable 2011
Revenue	$7.849 million	$17.428 million	Q2: $5.872 million; six months: $28.518 million
Operating income (loss)	($0.914 million)	($0.890 million)	Q2: ($1.807 million); six months: $11.667 million
Net income (loss) attributable to common stockholders	$0.118 million ($0.01/share)	$0.393 million ($0.02/share)	Q2: ($0.638 million); six months: $8.098 million ($0.41/share)
Operating cash flow	Not provided quarterly	$4.793 million	Six months: $3.552 million

Q2 revenue mix: Commercial/industrial $6.502 million, farming $1.253 million, and resort/residential $0.094 million.
Cash and liquidity: Cash and equivalents were $5.749 million and available-for-sale securities were $69.035 million at June 30; combined liquid assets were $74.784 million, down $12.154 million from year-end. Current assets were $91.683 million versus current liabilities of $6.580 million.
Cash flows for the first half: Operating activities provided $4.793 million; investing activities used $15.250 million; financing activities used $2.166 million. Cash declined $12.623 million to $5.749 million.
Debt: Total debt was $0.271 million; the $30 million revolving credit facility had no balance outstanding and matures in October 2013. The company reported a debt-to-total-capitalization ratio below 1% and compliance with its facility covenants.
Balance sheet: Total assets were $320.100 million, total liabilities $17.478 million, and total equity $302.622 million.

Material changes versus prior periods

First-half revenue fell 39% year over year, chiefly because first-half 2011 included $15.750 million from conservation-easement sales covering approximately 62,000 acres. No comparable easement sale was reported in 2012.
Commercial/industrial revenue increased $3.164 million in the first half, mainly from higher oil royalties. Oil production rose 37% and the average oil price increased 10% year over year. Four new wells drilled since late 2011 were in production.
Farming revenue increased $1.489 million in the first half, principally from pistachios, including carried-over crop inventory and a prior-crop price adjustment, and higher almond prices.
Q2 revenue rose 34% year over year, and the common-stockholder result improved from a loss to a small profit. Higher commercial and farming revenue and increased joint-venture earnings contributed.
First-half income was also affected by higher expenses, including increased corporate costs and stock-based compensation. The company accelerated compensation expense after meeting a Tejon Mountain Village litigation-free entitlement milestone.
Equity earnings from unconsolidated joint ventures were $0.534 million for the first half, versus a $0.030 million loss in the 2011 period. Improved TA/Petro results and occupancy and rent at a Rockefeller joint-venture building contributed.

Outlook, risks, and unusual items

Management estimated remaining-2012 investment requirements of approximately $14 million, including joint-venture contributions, TRCC-East infrastructure, and routine capital investment. A new TRCC-East infrastructure phase was anticipated in Q3 or Q4 2012; management estimated $8–9 million of cost and about nine months to complete after starting.
The company expected continued spending on development, entitlement, marketing, and infrastructure, while noting that real estate sales and leasing depend on market conditions and are difficult to predict. Management believed available resources were adequate for cash needs and investment requirements over the next few years, but noted future development may require additional financing.
Management expected 2012 almond production to be comparable to 2011 and almond pricing to remain comparable, while noting that crop prices depend on market conditions and world production. Farming revenue is seasonal; management cautioned that interim results are not indicative of full-year results.
TMV’s environmental entitlement judgment was affirmed on appeal; the decision became final June 25, 2012. A separate land-title suit remained pending, with a ruling anticipated in early August 2012; the company considered a negative outcome remote but said potential monetary impact could not be estimated.
Antelope Valley groundwater litigation remained in mediation, with a further trial phase scheduled for February 2013. The company said the effect on Centennial and other lands could not yet be determined. Other disclosed matters include ongoing groundwater monitoring and remediation associated with a tenant’s cement operations and water-bank litigation; some potential outcomes were not estimable.
Land subject to Wheeler Ridge-Maricopa water contracts carries estimated minimum annual payments of $2.5 million for as long as the company owns the affected land. The company also disclosed a $2.189 million standby letter of credit related to East CFD bonds; it said it would be drawn only if the company failed to pay property taxes.
Available-for-sale securities had a $0.552 million fair-value excess over cost, and management considered unrealized losses temporary. Marketable securities remain exposed to interest-rate and issuer risks; crop receivables are exposed to commodity-price changes.
The company reported no material change in risk factors and no material change in internal control over financial reporting. Its disclosure controls were assessed as effective.

Important facts for investors to verify

Whether oil production and royalty revenue, crop sales, and joint-venture earnings remain strong, given commodity-price and seasonal variability.
Progress, timing, and actual costs for the estimated $14 million of remaining-2012 investment and the planned $8–9 million TRCC-East infrastructure phase.
Development and entitlement progress for TMV and Centennial, including the status and possible consequences of outstanding litigation and groundwater allocation proceedings.
Cash and marketable-securities levels, covenant headroom, and access to the revolving credit facility as development spending continues.
The effects of accelerated stock compensation and other corporate-cost increases on future reported earnings.