Tejon Ranch Co. — Q2 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2014. Tejon Ranch is a diversified land development and agribusiness company, with commercial/industrial real estate, resort/residential development, mineral resources and farming segments. Results are seasonal and affected by the timing of crop sales, leasing and development activity.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $8.008 million | $7.475 million | $15.153 million | $17.235 million |
| Operating income (loss) | $(0.203) million | $1.167 million | $(2.196) million | $1.257 million |
| Net income attributable to common stockholders | $0.874 million | $2.084 million | $1.987 million | $2.699 million |
| EPS, basic and diluted | $0.04 | $0.10 | $0.10 | $0.13 |
| Operating cash flow | Not stated separately for the quarter | Not stated separately for the quarter | $2.128 million | $2.632 million |
- Revenue and segment trends: First-half revenue declined 12%, mainly as farming revenue fell $1.220 million and mineral revenue fell $0.926 million. Commercial/industrial revenue was nearly flat; resort/residential revenue increased from a low base. Q2 revenue rose 7%, primarily on improved crop prices and farming revenue.
- Profit and margins: First-half operating results turned to a $2.196 million loss; operating margin was approximately -14.5%, versus 7.3% a year earlier. Net income remained positive, supported by $3.179 million of net water-sale income, $1.586 million of joint-venture earnings and other income. First-half net income attributable to common stockholders declined 26%.
- Cash flow and investment: First-half operating cash flow was $2.128 million. Investing used $18.830 million, including $11.479 million of capital expenditures and $9.532 million of joint-venture investments. Financing provided $9.569 million, principally through net short-term borrowing. Cash fell to $1.898 million from $9.031 million at year-end.
- Liquidity and debt: Cash plus marketable securities totaled $54.742 million, down from $64.467 million at December 31, 2013. Current assets were $76.582 million and current liabilities $16.475 million. Total debt was $14.777 million, including $10.200 million drawn on a $30 million revolving facility and $4.577 million of bank debt. The revolver matures in December 2016; the company reported compliance with its tangible-net-worth and liquidity covenants.
- Balance sheet: Total assets were $354.014 million, total liabilities $30.625 million and total equity $323.389 million at June 30, 2014.
Material changes, outlook and key commentary
- Farming revenue decreased 22% in the first half, mainly because almond pounds sold fell 54% as prior-year inventory carryover was lower; higher almond and pistachio prices partly offset the volume decline. The company said the 2014 harvest was expected to begin in early August and that it was too early to predict crop production.
- Mineral revenue declined 16%, mainly due to lower oil production and leasehold payments. Six new production wells were completed in the first half, were still in testing, and were expected to enter production by year-end 2014. Oil prices averaged about $100 per barrel in the first half.
- Corporate expenses increased 34% year over year, largely reflecting higher stock compensation after 2013 reversals tied to the former CEO’s retirement, as well as pension-settlement-related expense.
- The company sold 6,250 acre-feet of water in the first half for $7.702 million, at a cost of $4.523 million, producing $3.179 million of net income. Management described this as a sale of water purchased under a long-term supply contract, after determining it had excess water for 2014 needs.
- Management anticipated increased retail activity as the Outlets at Tejon approached its planned August 2014 opening, with activity expected to continue into 2015. It also described continued spending on infrastructure, farming assets, water and land entitlement. The filing provides no earnings guidance.
- Management said it expected adequate cash flows and funding sources for internal operations over the next 12 months, while noting that future capital needs may require additional debt, joint ventures, asset sales or equity issuance and that favorable financing is not assured. Planned remaining-2014 investments included approximately $7.9 million for TRCC-East infrastructure, up to $6.9 million for Grapevine planning and entitlement, and up to $5 million across joint ventures.
Unusual items, risks and contingencies
- Tejon Mountain Village acquisition: After quarter-end, on July 15, 2014, the company acquired its partner’s interest in TMV LLC for $70 million in cash, becoming sole owner. It paid $10 million at closing and owed the remaining $60 million by October 13, 2014, with a one-time 30-day extension right. Management was working to arrange long-term debt to fund the purchase; final financing terms were not completed in the filing. Failure to pay by the deadline could void the transaction and allow the seller to retain the initial $10 million.
- Water commitments: Estimated contractual water payments total $286.248 million over the periods disclosed, including approximately $7.765 million due within one year. The company also has a water-purchase contract for 6,693 acre-feet annually through 2044, with an option to extend.
- Litigation and environmental matters: A notice of intent to sue challenged federal approvals for the Tehachapi Uplands habitat plan; no lawsuit had been filed as of the filing. The Antelope Valley groundwater adjudication remained unresolved, with further trial phases and possible settlement review scheduled. Water-bank litigation required a supplemental environmental review of local groundwater impacts, and the company said the effect on future operations could not yet be determined. The company also described ongoing environmental monitoring and cleanup obligations related to leased cement operations, while stating tenant indemnities were expected to apply.
- Other commitments: A $5.426 million standby letter of credit supports East Community Facilities District bonds; management said it did not expect it to be drawn. The company reported no material change to risk factors from its latest Form 10-K and stated that disclosure controls were effective.
- Commodity prices, crop yields, water availability and costs, development approvals, construction and leasing activity, financing access, and litigation outcomes could materially affect results. Management emphasized that interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether the $60 million remaining TMV purchase payment was made and on what financing terms; assess the resulting debt, interest costs and liquidity.
- Whether the Outlets at Tejon opened as planned and produced the anticipated retail, lease and development activity.
- Whether the six tested oil wells entered production by year-end and whether oil royalties recovered.
- How 2014 crop yields, realized almond and pistachio prices, and water availability affected farming results and working capital.
- Developments in the groundwater adjudication, water-bank litigation and habitat-plan challenge, including any effect on water rights or project entitlements.
- Actual capital spending, cash generation, borrowing and covenant headroom compared with management’s stated plans and liquidity expectations.