Tejon Ranch Co. — FY2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012. Tejon Ranch is a California land, real estate development and agribusiness company with approximately 270,000 acres. Its four reported segments are commercial/industrial real estate, resort/residential real estate, mineral resources and farming. In the fourth quarter, the company began reporting mineral resources as a separate segment.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue, including investment and other income | $48.444 million | $64.456 million |
| Operating income | $3.128 million | $20.874 million |
| Income before tax and equity earnings of joint ventures | $4.471 million | $22.232 million |
| Equity in earnings of unconsolidated joint ventures | $2.535 million | $0.916 million |
| Net income attributable to common stockholders | $4.441 million | $15.894 million |
| Diluted earnings per share | $0.22 | $0.80 |
| Cash provided by operating activities | $14.092 million | $9.484 million |
| Cash, cash equivalents and marketable securities | $72.268 million | $86.938 million |
| Total assets / total equity | $327.856 million / $308.259 million | $321.976 million / $300.439 million |
- Operating margin was approximately 6.5% in 2012, versus 32.4% in 2011; net income attributable to common stockholders was approximately 9.2% and 24.7% of total revenue, respectively.
- Investing activities used $23.273 million, including $20.669 million of capital expenditures and $6.154 million of joint-venture contributions. Financing activities used $1.972 million.
- Debt was minimal: $253,000 of long-term debt, with no balance drawn on the $30 million revolving credit facility at year-end. The company reported a debt-to-total-capitalization ratio below 1%. The facility was scheduled to mature in October 2013.
- No dividends were paid in 2012 or 2011; the company stated it did not then intend to pay dividends.
Material changes versus FY2011
- Total revenue fell about 25%, and common-stockholder net income fell about 72%. The main comparison factor was the $15.75 million conservation-easement sale recorded in 2011; there was no comparable sale in 2012. FY2011 also included a $4.34 million recognized gain from a Caterpillar land sale.
- Mineral resources revenue rose 15% to $14.012 million, led by higher oil production and exploration-lease revenue. Oil production reported by operators increased to 786,000 barrels from 738,000; the average oil price was approximately $103 per barrel versus $102.
- Farming revenue increased 7% to $22.553 million, mainly from pistachios and almonds, partly offset by lower winegrape revenue and production. Farming segment profit rose to $9.230 million from $8.437 million.
- Commercial/industrial revenue declined to $9.941 million from $13.746 million, primarily because of lower land-sale revenue and reduced hunting-program revenue. The segment recorded a $2.330 million loss, compared with $525,000 profit.
- Resort/residential recorded a $4.178 million segment loss, compared with $12.192 million profit in 2011, when the conservation-easement proceeds were recognized. Joint-venture earnings increased to $2.535 million, supported by the travel-plaza and Rockefeller ventures.
Outlook, commentary and risks
- Management said it expected cash and operating cash flows to fund internal operations over the next 12 months. It anticipated higher 2013 investment needs, including approximately $11.75 million for TRCC-East infrastructure, up to $3.7 million to begin Grapevine planning and entitlement, approximately $2.9 million for vineyard redevelopment, and up to $15.4 million for joint ventures. These are stated plans or estimates, not guaranteed expenditures.
- The company expected at least $14 million of reimbursement in 2013 from East CFD bond proceeds for completed infrastructure, subject to the applicable process. It also anticipated approximately $4.7 million for water infrastructure and purchases.
- Management planned to begin the Grapevine Development Area entitlement process in 2013; it could take several years and several million dollars. Centennial remained in the entitlement process, with no clear timetable or assurance of approval. TMV had received entitlement approval, affirmed on appeal in 2012; development timing depends on economic conditions and the second-home market.
- Water supply remains a material operating and development risk. The preliminary 2013 State Water Project allocation was 40% of entitlement. Management expected available sources to meet 2013 farming needs, but prolonged low allocations could increase costs or constrain operations. A court had found the Antelope Valley groundwater basin in overdraft; allocation and settlement issues remained unresolved.
- Crop results are sensitive to worldwide supply, demand, exchange rates and water costs. Year-end almond and pistachio receivables depended on estimated prices; management disclosed that a $0.01-per-pound price change would alter estimated receivables by about $14,000 for almonds and $18,000 for pistachios.
- Major risks include California entitlement and environmental review delays, third-party litigation, real estate and financing cycles, oil and gas price and production volatility, crop prices and yields, water availability, development costs, and reliance on joint-venture partners. Management cited expected entitlement and development spending and acknowledged that financing may not be available on favorable terms.
- Contingencies: the TMV land-title appeal was dismissed by the Ninth Circuit on February 26, 2013, after year-end. The Antelope Valley groundwater case and water-bank litigation remained unresolved, with potential outcomes not clearly estimable. Environmental cleanup at the National Cement site was being performed by tenants under indemnity obligations; the company reported no environmental-cost accrual at year-end and considered likely direct costs immaterial.
- The filing provides no formal earnings or revenue guidance. Management stated results would fluctuate with commodity markets, crop production, land sales and leases, and the timing of development. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether the company obtained or renewed its $30 million credit facility after its stated October 2013 maturity, and the terms and availability of any subsequent financing.
- Whether expected infrastructure reimbursements and planned 2013 capital and joint-venture investments occurred, and how they affected cash and liquidity.
- Progress, cost and approval status for Centennial and Grapevine entitlements and any commencement or schedule change for TMV development.
- Actual water allocations, groundwater adjudication outcomes, and the resulting effect on farming and development water costs or availability.
- Final settlement prices and collections for 2012 crop receivables, subsequent crop yields and pricing, and changes in oil production, prices or royalty revenue.
- Any material developments in water-bank litigation, environmental matters, or other contingent obligations, and the effect of the 2011 conservation-easement transaction on comparisons.