Tejon Ranch Co. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 4, 2012. Tejon Ranch is a diversified land development and agribusiness company operating in commercial/industrial real estate, resort/residential development, and farming. Financial figures below are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $9.579 | $22.646 |
| Operating income | $0.024 | $13.474 |
| Income before tax | $0.005 | $13.355 |
| Income tax expense (benefit) | $(0.228) | $4.660 |
| Net income attributable to common stockholders | $0.275; $0.01 per diluted share | $8.736; $0.44 per diluted share |
| Cash from operating activities | $(3.049) | $3.812 |
| Cash and cash equivalents | $1.945 | $18.372 at Dec. 31, 2011 |
| Marketable securities | $73.563 | $68.566 at Dec. 31, 2011 |
| Total assets | $319.434 | $321.976 at Dec. 31, 2011 |
| Total liabilities | $18.350 | $21.537 at Dec. 31, 2011 |
| Debt | $0.281; no line-of-credit borrowings | $0.290 at Dec. 31, 2011 |
- Combined cash, cash equivalents, and marketable securities were $75.508 million at quarter-end. The current ratio was approximately 12.8x, based on reported current assets and current liabilities.
- Operating margin was approximately 0.3%, versus 59.5% in Q1 2011; common-stockholder net margin was approximately 2.9%, versus 38.6%.
- Investing activities used $12.368 million, including $3.654 million of capital expenditures and $3.804 million contributed to unconsolidated joint ventures. Financing activities used $1.010 million. Cash fell by $16.427 million during the quarter.
- The company reported total capitalization of $301.365 million and a debt-to-total-capitalization ratio below 1%. Its $30 million revolving facility was undrawn and matures in October 2013. The company reported $301.365 million of tangible net worth against a $175 million minimum covenant and $75.508 million of liquid assets against a $25 million minimum.
Changes versus the prior comparable period
- Revenue declined $13.067 million, or 58%, primarily because Q1 2011 included $15.750 million from conservation easement sales covering about 62,000 acres. No comparable easement sale occurred in Q1 2012.
- Commercial/industrial revenue increased $1.768 million to $6.054 million, principally because oil and gas revenue rose to $3.665 million from $1.637 million. Management attributed the increase to higher oil prices and production; production rose 52%, with four new wells drilled since Q4 2011. The filing cautions that exploration activity does not ensure future discoveries or royalty growth.
- Farming revenue rose $0.874 million to $3.484 million, mainly from pistachios, including a $0.406 million price adjustment for the 2010 crop and sales of inventory carried over from 2011. Almond revenue was lower by $0.082 million.
- Corporate expenses rose $0.332 million, or 12%, mainly due to higher compensation; total expenses increased to $9.555 million from $9.172 million. Equity-method losses from unconsolidated joint ventures narrowed to $0.359 million from $0.442 million.
- Q1 2012 operating cash use compared with cash generation a year earlier; the company cited $3.401 million of income-tax payments and development and joint-venture investment. Q1 2011 investing cash flow benefited from the easement-sale proceeds.
Outlook, risks, contingencies, and unusual items
- Outlook: No formal earnings or revenue guidance is provided. Management estimated approximately $18 million of investment requirements for the remainder of 2012, including joint-venture contributions, TRCC-East infrastructure, and recurring capital investment. It said it expects adequate resources to fund needs over the next few years, while noting future development may require additional financing and that financing availability and terms are not assured.
- Seasonality and markets: Management says quarterly results are not indicative of full-year results; farming revenue is historically concentrated in Q3 and Q4, and real-estate sales and leasing depend on market timing. Almond pricing and crops, pistachio prices, water availability, oil and mineral prices, and development demand remain uncertain. Management expected 2012 almond production to be near 2011 levels and annual prices comparable to 2011, but said it was too early to predict with certainty.
- Development: The company was evaluating an outlet-center opportunity at TRCC-East and continued marketing industrial and retail development at TRCC-East and build-out at TRCC-West. Management noted depressed lease rates relative to pre-recession levels and the potential disadvantage of distance from the Port of Los Angeles.
- Legal and environmental matters: On April 25, 2012, after quarter-end, a California appellate court affirmed the favorable trial-court judgment on the Tejon Mountain Village environmental challenge; rehearing and state supreme court review petitions remained possible. A separate federal land-title suit concerning TMV had been dismissed again, with an amended complaint filed March 19, 2012; the company considered an adverse outcome remote, but said potential monetary impact could not be estimated. Antelope Valley groundwater allocation proceedings, water-bank litigation, and environmental cleanup obligations related to the National Cement site also remain relevant. The company described several potential legal exposures as not estimable from the information then available.
- Commitments: Water contracts require estimated minimum annual payments of $2.5 million while the company owns 5,488 acres, before potential credits, whether or not water is available or used. A $2.189 million standby letter of credit supports East CFD bonds and may be drawn if the company fails to pay property taxes; annual cost is approximately $33,000. Management expected to renew it. TRPFFA refinanced $22.5 million of West CFD bonds in Q1, enabling release of related land liens.
- Other items: The company recorded a $0.228 million income-tax benefit, primarily attributed to increased depletion allowances associated with higher oil and gas revenues. Available-for-sale securities had $0.622 million of net unrealized gains over cost; management considered unrealized losses temporary and reported no other-than-temporary impairments. Management identified no material change in risk factors, concluded disclosure controls were effective, and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the appellate ruling on Tejon Mountain Village faced further petitions, and the status, timing, and funding implications of TMV and Centennial entitlements and development.
- Progress and potential effects of groundwater allocation and water-bank litigation, including implications for Centennial and other land and water assets.
- Whether oil production and royalties, pistachio receipts, and almond pricing continued to support revenue, and how crop seasonality affected subsequent quarters.
- Actual 2012 development investment versus management’s approximately $18 million estimate, and the resulting liquidity and joint-venture funding needs.
- Compliance with the revolving-credit covenants, renewal and draw conditions for the East CFD standby letter of credit, and the company’s exposure to required water-contract payments.