Tejon Ranch Co. — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2012. Tejon Ranch is a diversified real estate development and agribusiness company with commercial/industrial real estate, resort/residential development, and farming segments. Its principal asset is approximately 270,000 acres of land in California. Results are seasonal and depend in part on crop harvests and the timing of real estate activity.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $16.114 million | $14.765 million | $33.542 million | $43.283 million |
| Operating income | $4.002 million | $3.035 million | $3.112 million | $14.702 million |
| Net income attributable to common stockholders | $4.021 million | $2.558 million | $4.414 million | $10.656 million |
| Basic and diluted EPS | $0.20 | $0.13 | $0.22 | $0.54 |
| Operating margin, calculated | 24.8% | 20.6% | 9.3% | 34.0% |
Cash flow and liquidity. For the nine months, operating cash flow was $11.486 million, investing cash flow was negative $20.510 million, and financing cash flow was negative $2.140 million. Cash and cash equivalents declined $11.164 million to $7.208 million. Cash, cash equivalents and marketable securities totaled $75.044 million, down 14% from year-end 2011. Capital expenditures were $15.777 million, including development and infrastructure spending; the company also contributed $5.404 million to unconsolidated joint ventures.
Debt and balance sheet. Total assets were $327.746 million and total equity was $307.385 million at September 30. Debt was approximately $262,000, including a $39,000 current portion; the $30 million revolving credit facility had no borrowings. The facility matures in October 2013 and requires at least $25 million of liquid assets and $175 million of tangible net worth. Reported liquid assets were $75.044 million and tangible net worth was $307.647 million.
Changes versus prior comparable periods
- Q3 revenue increased 9% and common-stockholder net income rose to $4.021 million from $2.558 million, reflecting stronger farming and commercial/industrial results and higher joint-venture earnings.
- Nine-month revenue fell 23%, and common-stockholder net income declined to $4.414 million from $10.656 million. The main comparison factor was the $15.750 million sale of conservation easements in 2011; excluding that sale, management said revenue increased $6.009 million and net income increased $3.938 million year over year.
- Commercial/industrial revenue rose $3.589 million year to date, primarily from higher oil royalties. Oil production increased 35% year over year, and oil prices were 9% higher on average. Farming revenue rose $2.369 million, principally due to pistachios and almonds.
- Operating expenses and corporate costs increased year to date, including higher corporate compensation and stock compensation. The nine-month effective tax rate was approximately 25%, versus 35% in 2011, primarily due to increased depletion allowances associated with higher oil and gas revenue.
Outlook, risks and contingencies
- Management estimated approximately $8 million of investment requirements for the remainder of 2012, including joint-venture contributions, TRCC-East infrastructure, and recurring capital spending. A new TRCC-East infrastructure phase began in September; the company estimated approximately $8 million of cost and completion by the end of Q1 2013.
- The company was evaluating an outlet center at TRCC-East. Management noted that the timing and extent of real estate demand are difficult to predict and that development will require substantial future investment. It believed existing resources were adequate for cash needs and investment requirements over the next few years, while noting that future financing may be needed and is not assured on favorable terms.
- Management expected 2012 almond pricing to be comparable to or possibly better than 2011 and pistachio pricing to be in line with 2011. Crop revenue remains exposed to global crop size, commodity prices, yields, and water availability. The filing cautions that seasonal quarterly results are not indicative of full-year performance.
- At September 30, $7.756 million of accounts receivable was exposed to changing crop prices, mainly pistachios ($5.558 million), wine grapes ($1.672 million), and almonds ($526,000).
- The Tejon Mountain Village environmental appeal was resolved in the company’s favor and became final in June 2012. A separate land-title lawsuit was dismissed with prejudice, but the plaintiff appealed in September; the company considered an adverse outcome remote, with any monetary impact not estimable.
- Antelope Valley groundwater litigation remains active, with mediation and a further trial phase planned; the company said the effect on its Centennial project and other lands could not yet be determined. Other disclosed matters include water-bank litigation and continuing environmental monitoring and cleanup obligations at leased National Cement property. The company cited tenant indemnities and assessed likely costs as not material, but outcomes remain subject to uncertainty.
- Contractual obligations totaled $67.112 million, including estimated minimum annual water-contract payments of $2.5 million and $5.111 million of cash contract commitments. A $2.189 million standby letter of credit supports East CFD bonds; the company said it would be drawn only if it failed to pay property taxes. The filing also reports approximately $107 million of additional East CFD bond debt authorized for future sale.
- In October 2012, the company filed a shelf registration statement that, once effective, could permit future offerings of equity or debt securities. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether oil production and royalty growth, and improved joint-venture earnings, continue to offset higher operating and development costs.
- Final realized crop prices and collections on the $7.756 million of price-sensitive farm receivables, along with crop yields and water availability.
- Actual costs and timing for TRCC-East infrastructure and the expected remainder-of-2012 investment program; also the funding plan as the credit facility approaches its October 2013 maturity.
- Developments in the groundwater and water-bank cases, the Robinson appeal, and the company’s potential exposure under water, environmental, and CFD obligations.
- Whether the planned development and entitlement projects achieve approvals and market demand sufficient to support the substantial future capital required.