Tejon Ranch Co. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited consolidated results. Tejon Ranch operates commercial/industrial real estate, resort/residential development and farming businesses. Results are seasonal and depend in part on the timing of real estate transactions.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $5.872m | $4.263m | $28.518m | $8.351m |
| Operating income (loss) | ($1.807m) | ($2.503m) | $11.667m | ($4.876m) |
| Net income (loss) attributable to common stockholders | ($0.638m) | ($1.149m) | $8.098m | ($2.482m) |
| Basic and diluted EPS | ($0.03) | ($0.06) | $0.41 | ($0.14) |
Q2 revenue increased 38%, primarily from higher oil royalties: average oil prices rose 52% and production increased 43%. The six-month revenue and earnings comparison was dominated by a first-quarter $15.750m sale of five conservation easements covering approximately 62,000 acres. The company retains ownership and existing revenue-generating uses of the land, but the easements preclude long-term development there. Other six-month revenue growth included higher farming revenue ($2.591m, mainly almonds) and commercial/industrial revenue ($1.748m, primarily oil royalties).
Six-month operating results also reflected higher costs: corporate expenses rose $1.476m, largely from compensation and stock-based compensation; farming costs increased $1.699m, mainly cost of sales for carried-over almond inventory. Q2 remained loss-making despite stronger revenue; corporate expenses rose $0.711m, substantially due to stock compensation.
Cash flow, liquidity and capital structure
- Six-month operating cash flow was $3.552m, versus $0.738m in 2010. Investing used $7.311m, including capital expenditures of $5.760m, net investment in marketable securities, joint-venture contributions and a $0.485m investment in a pistachio processor. Financing provided $1.479m.
- Cash and cash equivalents were $19.747m at June 30, down from $22.027m at year-end. Cash plus marketable securities totaled $84.039m, up $13.027m from year-end, reflecting principally the easement proceeds and securities investment activity.
- Current assets were $98.578m and current liabilities $7.702m. Total debt was approximately $0.307m; the $30m revolving credit facility had no borrowings and matures in October 2013. The company reported $288.667m of equity and a debt-to-total-capitalization ratio below 1%.
- Management estimated approximately $10m of additional investment requirements for the rest of 2011, including development projects, joint ventures and infrastructure. It expected adequate capital resources for needs over the next few years, while noting future development may require additional financing.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management anticipated increased oil exploration drilling in the second half of 2011 but cautioned that activity may not produce new oil or higher royalties. It expected industrial-market excess capacity and depressed lease pricing could persist through 2011.
- Management estimated 2011 almond production would be roughly on par with 2010, with pistachio production expected to be significantly lower because of alternate bearing. Crop prices remain exposed to global supply, demand, currency and market conditions; results are seasonal and quarterly performance is not indicative of the full year.
- Key development risks include market demand, financing, water availability and obtaining approvals. Tejon Mountain Village faces a CEQA appeal and a refiled federal lawsuit alleging land-title issues. Other unresolved matters include Antelope Valley groundwater adjudication, water-bank litigation, and a California Attorney General case involving TravelCenters of America/Petro facilities; potential losses in certain cases could not be estimated.
- Environmental monitoring and cleanup obligations relate to land leased to National Cement and its predecessor; the company expects tenant indemnities to cover these matters. A Burrows lawsuit concerning the Centennial project was settled in June 2011 for an amount described as immaterial.
- Minimum 2011 water-contract payments were estimated at $2m before potential credits. The company also had $6.773m of standby letters of credit supporting community-facilities-district bonds; they may be drawn if it fails to pay property taxes, and cost about $0.1m annually. Approximately $107m of additional East CFD bond debt was authorized for possible future issuance.
Important facts for investors to verify
- How much of the six-month profit is repeatable after excluding the $15.750m easement sale, and the pace of recurring leasing, royalty and farming income.
- Progress and potential outcomes of the TMV, water-rights and TravelCenters-related litigation, including whether any losses or costs become estimable.
- Actual 2011 crop yields and realized almond and pistachio prices, and oil exploration results versus management’s activity expectations.
- Funding and timing for the estimated $10m of second-half investment, and continued availability of the $30m credit line.
- Potential future special-tax obligations, standby-letter-of-credit renewals and issuance of additional East CFD bonds.