Tejon Ranch Co. — Q2 2013 Form 10-Q
Business context and reporting period
Tejon Ranch Co. is a diversified land development and agribusiness company with approximately 270,000 acres. It reports commercial/industrial real estate, resort/residential real estate, mineral resources, and farming segments. This unaudited filing covers the quarter and six months ended June 30, 2013; amounts below are in millions except per-share data. Results are seasonal and can vary with crop sales and real estate activity.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $7.475 | $7.849 | $17.235 | $17.428 |
| Operating income (loss) | $1.167 | ($0.914) | $1.257 | ($0.890) |
| Income before tax | $2.689 | $0.274 | $3.466 | $0.279 |
| Net income attributable to common stockholders | $2.084 | $0.118 | $2.699 | $0.393 |
| Diluted earnings per share | $0.10 | $0.01 | $0.13 | $0.02 |
Operating margin was approximately 15.6% in Q2 and 7.3% for the first half, versus operating losses in both prior-year periods. Revenue declined 5% in Q2 and 1% for the first half. The filing does not present a consolidated gross margin.
- Segment trends, first half: Commercial/industrial revenue rose 16% to $5.547 million; resort/residential revenue rose to $0.471 million; farming revenue increased 18% to $5.586 million; mineral resources revenue fell 28% to $5.631 million.
- Lower oil and gas production and prices reduced mineral revenue; oil production was affected by temporary well closures for maintenance, facility expansion, and permitting. Farming benefited particularly from higher almond prices, while water costs increased.
- Equity earnings from unconsolidated joint ventures increased to $1.679 million from $0.534 million for the first half, chiefly reflecting improved TA/Petro and Five West results. Corporate expenses fell substantially, mainly due to stock-compensation reversals.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $2.632 million, down from $4.793 million. Investing activities provided $1.281 million, versus $15.250 million used in the prior year; financing activities used $0.654 million.
- Cash and cash equivalents were $10.478 million and available-for-sale marketable securities were $64.916 million at June 30, 2013. Together these totaled $75.394 million, compared with $72.268 million at year-end 2012.
- Total assets were $329.873 million; total liabilities were $20.246 million; equity was $309.627 million. Debt was $0.233 million, with a debt-to-total-capitalization ratio below 1%.
- The $30 million revolving credit line had no borrowings at quarter-end and was scheduled to mature in October 2013. The company reported compliance with its $175 million tangible-net-worth and $25 million liquid-assets covenants; it reported $309.860 million of tangible net worth and $75.394 million of liquid assets.
- Capital expenditures were $10.653 million in the first half. Management estimated approximately $20 million of investment requirements for the remainder of 2013, including joint ventures, TRCC-East infrastructure, crop development, and Grapevine-area planning and entitlement.
Outlook, material developments, and risks
- No specific earnings or revenue guidance was provided. Management said 2013 almond and pistachio prices were strong to date and expected crop pricing to be comparable to, and possibly better than, 2012, while emphasizing uncertainty about crop size and final prices.
- Construction of an outlet center through the new TRCC/Rockefeller joint venture began in Q2; completion was expected in summer 2014. The company was seeking tenant commitments. It also began preliminary planning and information gathering for an environmental impact report for the approximately 15,700-acre Grapevine Development Area.
- Management cited risks from commodity prices, weather and water availability, real estate demand, financing availability, and obtaining development approvals. The company noted a severe State Water Project shortage and minimum water-contract payments of about $2.5 million annually through 2035, whether or not water is available or used.
- CEO and President Robert A. Stine announced retirement at year-end 2013. The resulting adjustment to his performance-grant service period caused a $2.271 million reversal of previously recognized stock compensation in Q2; a separate executive departure resulted in a $0.485 million reversal in Q1. These noncash items materially affected expense comparisons.
- The company reported a $5.426 million standby letter of credit associated with East Community Facilities District bonds; management said it expected it would not be drawn. The East district had approximately $80.25 million of additional authorized bond debt available for future issuance.
- Legal and environmental matters include an appeal in the Tejon Mountain Village land-title case, groundwater-rights adjudication in the Antelope Valley, and water-bank litigation. The company said the adverse outcome and potential monetary effect of certain matters could not be estimated; it considered a negative outcome in the Tejon Mountain Village case remote. Environmental cleanup and monitoring obligations at the National Cement lease property were ongoing, with tenant indemnities in place.
- Subsequent to quarter-end, the board declared a distribution of warrants expected to total approximately 3 million. Each warrant permits purchase of one common share at an initial $40 exercise price and is exercisable through August 31, 2016, subject to possible acceleration.
Important facts for investors to verify
- Whether the credit facility maturing in October 2013 was renewed or replaced, and whether liquidity covenants or borrowing terms changed.
- Progress on outlet-center construction, tenant commitments, project costs, and the expected 2014 opening; also the amount and timing of planned second-half investment.
- Whether lower oil and gas production continues and how oil prices, crop yields, almond and pistachio prices, and water availability affect results.
- The sustainability of reported earnings given the unusually large stock-compensation reversals and increased equity-method earnings from joint ventures.
- Developments in groundwater and water-bank litigation, the Tejon Mountain Village appeal, and any resulting effect on water access, entitlements, or land value.
- Warrant distribution terms and potential dilution if warrants are exercised.