TRC

TEJON RANCH CO. - 10-Q Summary (Period Ended September 30, 1999)

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for Tejon Ranch Co., a diversified agricultural and real estate company, for the three and nine months ended September 30, 1999. The company operates in livestock, farming, resource management, and real estate sectors. Management notes that results are seasonal, with the largest revenue percentages historically recognized in the third and fourth quarters.

Key Financial Metrics

Cash Flow (9 Months 1999): Net cash used in operating activities was $(1,787) thousand. Net cash used in investing activities was $(14,739) thousand, driven by property expenditures of $22,473 thousand. Net cash provided by financing activities was $16,337 thousand, primarily from proceeds on revolving lines of credit.

Material Changes vs. Prior Period

• Revenue Growth: Nine-month revenues increased 17% to $38.1 million. Growth was driven by Real Estate (+$3.2M), Livestock (+$1.1M), Resource Management (+$0.9M), and Farming (+$0.7M).
• Real Estate: Significant revenue increase attributed to a $1.75M fiber optic easement sale, $0.9M from an Enron land lease option, and $0.64M from new commercial property acquisitions in Phoenix and Rancho Santa Fe.
• Livestock: Revenues rose due to selling 12,700 additional head of cattle compared to 1998. However, feedlot revenues declined due to lower occupancy and feed prices.
• Profitability: While nine-month net income more than doubled to $0.6M, third-quarter net income dropped significantly to $0.8M from $2.0M in Q3 1998. This decline was caused by higher operating costs in livestock, farming, and real estate (including $0.68M in Petro Travel Plaza start-up costs) outpacing revenue gains.
• Liquidity: Working capital decreased by approximately 78% from year-end 1998 due to capital expenditures and increased short-term debt usage to fund inventory and receivables.

Outlook, Risks, and Management Commentary

• Commodity Prices: Cattle prices have strengthened due to demand but remain below potential levels due to Asian economic impacts. Almond prices have declined to ~$0.80/lb due to a record harvest and federal marketing reserves; 1999 crop revenues are expected to be lower than 1998.
• Environmental Contingencies: The company is secondarily liable for environmental cleanup at a leased cement site (National Cement/Lafarge). Management believes a material effect is remote due to the indemnification and financial strength of the lessees.
• Market Risk: Approximately 26% of cattle inventory (11,454 head) is unhedged. Receivables for almonds, pistachios, and walnuts are recorded at estimated prices, creating exposure to final settlement prices in late 1999/2000.
• Year 2000: The company completed system conversions in 1997 and believes any Y2K issues will be immaterial, though contingency plans are in place.
• Capital Resources: The company has fully utilized its $28M revolving line of credit and a $6.5M feedlot line. Future growth projects (farming, cattle herd, real estate) will be funded by cash, borrowings, or joint ventures.

Investor Verification Checklist

• Verify the final settlement prices for the 1999 almond, pistachio, and walnut crops, as current receivables are based on estimates that may differ significantly from final values.
• Monitor the status of the environmental cleanup at the National Cement site to ensure the lessees (National/Lafarge) continue to meet their obligations, preventing secondary liability for Tejon.
• Assess the impact of the $22.5M in property and equipment expenditures on future cash flow requirements and debt service capabilities.
• Review the occupancy rates and lease escalations for the newly acquired Phoenix and Rancho Santa Fe commercial properties to validate projected revenue streams.
• Track the unhedged cattle inventory exposure (approx. 11.5M lbs) against volatile beef market prices.