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PICO > SEC Filings for PICO > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for PICO HOLDINGS INC /NEW


10-May-2013

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read together with the Unaudited Condensed Consolidated Financial Statements and accompanying Notes included elsewhere in this report, and the Consolidated Financial Statements and accompanying Notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Note About "Forward-Looking Statements"

This Quarterly Report on Form 10-Q (including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section) contains "forward-looking statements," as defined in Section 21E of the United States Securities Exchange Act of 1934, as amended, regarding our business, financial condition, results of operations, and prospects, including, without limitation, statements about our expectations, beliefs, intentions, anticipated developments, and other information concerning future matters. Words such as "may", "will", "could", "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "should", "target", "projects", "contemplates", "predicts", "potential", "continue" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report on Form 10-Q. Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on current expectations and assumptions. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and the actual results and outcomes could differ from what is expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the headings "Item 1A. Risk Factors" in our 2012 Annual Report on Form 10-K, in Item 1A of Part II of this Quarterly Report on Form 10-Q, and in other filings made from time to time with the United States Securities and Exchange Commission ("SEC") after the date of this Quarterly Report on Form 10-Q. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to (and we expressly disclaim any obligation to) revise or update any forward-looking statement, whether as a result of new information, subsequent events, or otherwise (except as may be required by law), in order to reflect any event or circumstance which may arise after the date of this Quarterly Report on Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report on Form 10-Q and our Form 10-K and other filings.

BUSINESS STRATEGY AND GOALS

PICO Holdings, Inc. is a diversified holding company. In this Quarterly Report, PICO and its subsidiaries are collectively referred to as "PICO," "the Company," or by words such as "we" and "our." We seek to build and operate businesses where we believe significant value can be created from the development of unique assets, and to acquire businesses which we identify as undervalued and where our management participation in operations can aid in the recognition of the business's fair value, as well as create additional value.

Our objective is to maximize long-term shareholder value and to manage our operations to achieve a superior return on net assets over the long term, as opposed to short-term earnings. We own and operate several diverse businesses and assets. Our portfolio of businesses is designed to provide a mix of revenues and income from both long-term assets that may require several years to develop and monetize and shorter-term operations that should generate recurring revenue each quarter.

As of March 31, 2013 our business is separated into five operating segments:
• Water Resource and Water Storage Operations;
• Real Estate Operations;
• Agribusiness Operations;
• Enterprise Software; and
• Corporate


As of March 31, 2013, our major consolidated subsidiaries are (wholly-owned unless noted):
• Vidler Water Company, Inc. ("Vidler") which acquires and develops water resources and water storage operations in the southwestern United States, with assets and operations in Nevada, Arizona, Idaho, Colorado and New Mexico;
• UCP, LLC ("UCP"), which acquires and develops partially-developed and finished residential housing lots in selected markets in California and Washington;
• PICO Northstar Hallock, LLC, an 88% owned subsidiary, doing business as Northstar Agri Industries ("Northstar"), which has constructed a canola seed crushing facility in Hallock, Minnesota. The plant commenced full-scale production in the third quarter of 2012;
• Spigit, Inc. ("Spigit") a 67% owned subsidiary that develops enterprise innovation software.

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2013 AND 2012

Overview of Economic Conditions and Impact on Results of Operations

The economic environment and housing slow-down in the U.S. during the past several years significantly decreased the rate of growth in the Southwest and the demand for our water and real estate assets in certain markets. However, we have seen improvement in the housing markets recently which has led to increased levels of real estate development activity. We believe that a continuation of the housing recovery will ultimately lead to increased demand for our real estate and water assets. We have not been required to record any impairment charges on our real estate and water assets during the year ended December 31, 2012 or the three months ended March 31, 2013. However, any deterioration in the markets in which we operate has the potential to cause impairment losses on our real estate and water assets.

The focus of our operations is building long-term shareholder value. Our revenues and results of operations can and do fluctuate widely from period to period. For example, we recognize revenue from the sale of real estate and water assets when specific transactions close, and as a result, sales of real estate and water assets for any individual quarter are not necessarily indicative of revenues for future quarters or the full financial year.

PICO Shareholders' Equity

Our shareholders' equity declined $13 million or $0.58 per share, during the three months ended March 31, 2013, from $473.2 million, or $20.82 per share at December 31, 2012 to $460.2 million, or $20.24 per share at March 31, 2013. The decrease in our shareholders' equity was primarily due to the $15 million net loss during the period.

Business Combination

Effective January 31, 2013, the Company acquired additional voting preferred stock in Spigit, Inc., a privately held company that develops enterprise innovation software ("Spigit") for $5 million by obtaining newly issued shares directly from Spigit. As a result of the transaction, the Company's voting ownership increased from 28% at December 31, 2012 to 67% at March 31, 2013. In accordance with applicable accounting guidance, the acquisition was accounted for under the acquisition method of accounting and, as such, the results of Spigit were included in the Company's results of operations from the date of acquisition. The Company reported the results of Spigit as a new reportable segment. For the three months ended March 31, 2013, the acquisition and consolidation of Spigit increased assets and liabilities by approximately $21.5 million and $20.4 million, respectively.

Total Assets and Liabilities

Total assets increased by $8.7 million from $667.2 million at December 31, 2012 to $675.9 million at March 31, 2013. The Company's real estate and water assets increased $18.8 million primarily due to acquisitions and development costs in real estate projects in UCP. Notes and other receivables and other assets increased by $28.5 million primarily due to the business combination of Spigit, which accounted for $21.5 million of the increase. Cash and cash equivalents decreased $37.7 million as the Company used cash to fund the acquisition and development of its real estate projects, and for overhead and other operating costs. During the first three months of 2013, total liabilities increased by $23.3 million, from $188.7 million at December 31, 2012 to $212 million at March 31, 2013. The change was due to an increase in the Company's debt balance of $17.8 million, primarily from a net increase of $8.8 million in mortgages incurred for the acquisition of real estate, the consolidation of the $8 million bank loan owed by Spigit, and an increase of $5.2 million in other liabilities which was primarily due to the consolidation of Spigit's $6.8 million deferred revenue balance.


Net Loss

We reported a net loss from continuing operations, after noncontrolling interest, of $15 million, or $0.66 per share and $5.5 million, or $0.24 per share for the first quarter ended March 31, 2013 and 2012, respectively. The increase in our net loss resulted from a year-over-year increase in the loss reported within our agribusiness segment.

Noncontrolling Interests

The net loss reported in noncontrolling interest represents the share of net income or loss from our less than wholly-owned consolidated subsidiaries that is allocated, based on relative ownership percentage, to the noncontrolling shareholders of those entities. Currently, the most significant subsidiaries that are less than wholly-owned in our condensed consolidated financial statements are Northstar, Fish Springs, and beginning January 31, 2013, Spigit. Loss attributable to noncontrolling interests was $1.8 million and $222,000 for the three months ended March 31, 2013 and 2012, respectively. A total of $1.2 million of the noncontrolling interest recorded during the three months ended March 31, 2013 was in our agribusiness operations based on a reported net loss in that segment of $9.7 million.

Comprehensive Loss

For the first quarter of 2013, we reported a comprehensive loss of $14 million which consisted primarily of a net loss of $15 million, offset by an increase of $752,000 in unrealized appreciation on available-for-sale securities.

Segment Results of Operations

Our segment revenue and loss before income taxes for the first quarter of 2013
and 2012 were:
                                               Three Months Ended
Thousands of dollars                               March 31,
                                               2013          2012        Change
Revenue:
Water Resource and Water Storage Operations $     184     $  1,455     $  (1,271 )
Real Estate Operations                         11,939        3,824         8,115
Agribusiness Operations                        39,565           27        39,538
Enterprise Software                             3,650                      3,650
Corporate                                       1,470          379         1,091
Total revenue                               $  56,808     $  5,685     $  51,123

Loss before income taxes:
Water Resource and Water Storage Operations $  (2,141 )   $ (1,161 )   $    (980 )
Real Estate Operations                           (711 )     (1,345 )         634
Agribusiness Operations                        (9,715 )       (526 )      (9,189 )
Enterprise Software                            (1,150 )                   (1,150 )
Corporate                                      (3,842 )     (3,901 )          59
Loss before income taxes                    $ (17,559 )   $ (6,933 )   $ (10,626 )

First Quarter Revenue

Our first quarter revenue was $56.8 million in 2013, compared to $5.7 million in 2012, an increase of $51.1 million year-over-year. This increase was primarily due to a 39.5 million increase in agribusiness revenue as we commenced crushing canola seed and selling canola oil and meal after the first quarter of 2012, and an 8.1 million increase in real estate revenue due to a higher volume of sale of residential homes.


First Quarter Costs and Expenses

First quarter costs and expenses were $74.4 million in 2013, compared to $12.6 million in 2012, an increase in year-over-year expenses of 61.7 million. The increase in expenses is due primarily to increases in operating expenses in two of our segments. Our agribusiness operations reported an increase in expenses of $48.7 million, primarily from a $40.6 million increase in cost of sales of canola oil and meal, and an $8.1 million increase in overhead, interest and depreciation expenses. Our real estate segment reported an increase in expenses of $7.5 million which was primarily due to a $5.7 million increase in cost of real estate sales.

First Quarter Loss Before Income Taxes

Our first quarter year-over-year net loss before income taxes increased by $10.6 million primarily due to a $9.2 million increase in the loss reported by our agribusiness segments.

First Quarter Income Taxes and Noncontrolling Interest in Subsidiaries

In the first quarter of 2013, we reported a net loss of $15 million, or $0.66 per share. We recorded a $784,000 tax benefit and noncontrolling interests reported a loss of $1.8 million.

We reported a net loss of $4.9 million, or $0.22 per share for the first quarter of 2012 after a $1.2 million tax benefit. During the three months ended March 31, 2012, noncontrolling interests reported expense of $222,000

Our effective tax rate for the first quarter of 2013 and 2012 was a tax benefit of 4% and 17% respectively, compared to the Federal corporate income tax rate of 35%. In 2013 and 2012, the difference from the statutory rate is primarily due to the full valuation allowance recorded on our net deferred taxes.

                  WATER RESOURCE AND WATER STORAGE OPERATIONS
                                             Three Months Ended
Thousands of dollars                             March 31,
                                             2013          2012       Change
Revenue:
Sale of real estate and water assets      $       4     $     10     $    (6 )
Other                                           180        1,445      (1,265 )
Total revenue                                   184        1,455      (1,271 )

Costs and expenses:
Cost of real estate and water assets sold        (1 )         (2 )         1
Interest expense                                (11 )        (17 )         6
Depreciation and amortization                  (325 )       (322 )        (3 )
Overhead                                     (1,491 )     (1,491 )         -
Project expenses                               (497 )       (784 )       287
Segment total expenses                       (2,325 )     (2,616 )       291
Loss before income taxes                  $  (2,141 )   $ (1,161 )   $  (980 )

Historically, Vidler and its subsidiaries' revenue has been volatile and infrequent. Since the date of closing generally determines the accounting period in which the sales revenue and cost of sales are recorded, Vidler's reported revenue and income fluctuate from period to period, depending on the dates when specific transactions close. Consequently, sales of real estate and water assets in any one year are not necessarily indicative of likely revenue in future years.


Segment Revenue

There were no significant sales of water rights and related real estate assets in the first quarter of 2013 and 2012. Revenue generated in the first quarter of both periods consisted of lease income from our ranch and farm properties. In addition, in the first quarter of 2012, due to the expiration of an option we had entered in to with a potential purchaser of our Lincoln County, Nevada power plant project, we generated revenues of $1.3 million from the option fees we had previously recorded as unearned.

Segment Expenses

In the first quarter of 2013, our total expenses decreased by $291,000 compared to 2012.

Project expenses consist of costs related to the development of existing water resources, such as maintenance and professional fees. Project expenses are expensed as appropriate and fluctuate from period to period depending on activity with Vidler's various water resource projects. Project expenses principally relate to:
• the operation and maintenance of the Vidler Arizona Recharge Facility;
• the development of water rights in the Tule Desert groundwater basin and the Dry Lake Valley (both part of the Lincoln County, Nevada agreement);
• the utilization of water rights at Fish Springs Ranch as a future municipal water supply for the north valleys of the Reno, Nevada area;
• the operation of our farm properties in Idaho; and
• certain exploration costs for water resource development in New Mexico

Project expenses declined by $287,000 in the first quarter of 2013 as compared to the first quarter of 2012 and the year over year overhead costs were unchanged at $1.4 million in both periods.

The year over year segment loss increased by $980,000 for the first quarter. This was due primarily to option fees earned of $1.3 million in 2012 with no corresponding option fees earned in the first quarter of 2013. This reduction in revenue was partially offset by a year over year reduction in project expenses of $287,000 in the first quarter of 2013 as compared to the first quarter of 2012. There were no impairment charges recorded in the first quarter of 2013 or 2012.

                             REAL ESTATE OPERATIONS
                                             Three Months Ended
Thousands of dollars                             March 31,
                                             2013          2012       Change
Revenue:
Sale of real estate and water assets      $  11,803     $  3,535     $ 8,268
Other                                           136          289        (153 )
Total revenue                                11,939        3,824       8,115

Costs and expenses:
Cost of real estate and water assets sold    (8,052 )     (2,308 )    (5,744 )
Interest expense                                            (352 )       352
Operating expenses                           (4,598 )     (2,509 )    (2,089 )
Segment total expenses                      (12,650 )     (5,169 )    (7,481 )
Loss before income taxes                  $    (711 )   $ (1,345 )   $   634

As of March 31, 2013, our businesses in the real estate operations segment are primarily conducted through UCP and its homebuilding and land development operations in California and Washington.


Our real estate sales are contingent upon numerous factors and, as such, the timing and volume of real estate sales in any one quarter is unpredictable. Historically, the level of real estate sales has fluctuated from period to period. Accordingly, it should not be assumed that the level of sales as reported will be maintained in future years.

In the first quarter of 2013 and 2012, UCP sourced, underwrote and acquired real estate in its target markets to increase its land inventory and ability to either build and sell homes through its wholly owned subsidiary, Benchmark Communities, or develop land and sell lots to third-party homebuilders. UCP actively acquires and develops lots in California and Washington State in an effort to maintain and grow its lot supply. In addition to expanding its business in existing markets in California and Washington State, UCP continues to evaluate opportunities to expand into other markets with favorable housing demand fundamentals, including, in particular, long-term population and employment growth.

                           Owned and Controlled Lots

As of March 31, 2013, and December 31, 2012, we owned or controlled, pursuant to
purchase or option contracts, an aggregate of 5,061 and 4,916 lots,
respectively. The following tables present certain information with respect to
our owned and controlled lots as of March 31, 2013 and December 31, 2012.
                                                 As of March 31, 2013
                                            Owned       Controlled(1)    Total
Central Valley Area-California            1,875                   364    2,239
Monterey Bay Area-California              1,599                          1,599
South San Francisco Bay Area-California      70                   347      417
Puget Sound Area-Washington                 711                    95      806
Total                                     4,255                   806    5,061



                                                  As of December 31, 2012
                                              Owned         Controlled(1)    Total
Central Valley Area-California             1,880                      599    2,479
Monterey Bay Area-California               1,602                        -    1,602
South San Francisco Bay Area-California       32                       92      124
Puget Sound Area-Washington                  711                        -      711
Total                                      4,225                      691    4,916

(1) Controlled lots are those subject to a purchase or option contract.

Of these lots, 93 are completed homes or homes under construction in California. Currently, we are seeing strong indicators - both in our specific markets as well as nationally - of a housing recovery. These indicators include modestly rising home prices, tightening supplies of inventory and increased rates of turnover of the available housing inventory. The continued strength and depth of the housing recovery, as well as our operating capacity, will determine how many homes we ultimately construct on our inventory of finished lots and those lots that we are in the process of developing into finished lots.

As of March 31, 2013, we have invested capital of over $142 million for the acquisition and development of these lots. Approximately $38 million of this capital has been financed by project specific debt, substantially all of which is non-recourse.

Segment Revenue and Gross Margin

In the following discussion, gross margin is defined as revenue less cost of sales, and gross margin percentage is defined as gross margin divided by revenues.

In the first quarter of 2013, total segment revenue increased by 212% to $11.9 million as compared to total segment revenue of $3.8 million in the first quarter of 2012. This increase in revenue of $8.1 million was primarily attributable to an increase in both the quantity of homes and lots sold and the average selling price ("ASP") of homes and lots sold in the first quarter of 2013 as compared to the first quarter of 2012 as follows:


•an increase in the number of homes sold to 12 homes in the first quarter of 2013 as compared to 6 homes in the first quarter of 2012. The total number of active selling communities increased from two in the first quarter of 2012 to five in the first quarter of 2013;
•an increase in the ASP of homes sold of approximately 41% to $361,000 per home in the first quarter of 2013 as compared to $256,000 per home in the first quarter of 2012;
•an increase of approximately 108% in the quantity of lots sold to 54 units in the first quarter of 2013 as compared to 26 units in the first quarter of 2012; and
•an increase of approximately 77% in the ASP of lots sold to $138,000 per lot sold in the first quarter of 2013 as compared to $77,000 in the first quarter of 2012.

Total gross margin increased by approximately $2.5 million to $3.8 million in the first quarter of 2013 as compared to $1.2 million in the first quarter of 2012. This increase in gross margin was primarily due to the increased volumes of both lots and homes sold in the first quarter of 2013 as compared to the first quarter of 2012. The gross margin percentage of lots sold in the first quarter of 2013 and 2012 was approximately the same (39% in 2013 as compared to 38% in 2012). The gross margin percentage of homes sold declined to 20% in the first quarter of 2013 as compared to 31% in the first quarter of 2012. This gross margin percentage decline was primarily attributable to the favorable cost basis of the active selling communities in 2012.

Summary Results of UCP Revenue and Gross Margin

                                      Three Months Ended March 31,
                                         2013               2012           Change
Lots sold                                     54                  26          28
Homes sold                                    12                   6           6

Revenue (in thousands)
 Lot revenue - total               $       7,470       $       2,002     $ 5,468
 Lot revenue - per lot             $         138       $          77     $    61

 Home revenue - total              $       4,333       $       1,533     $ 2,800
 Home revenue - per home           $         361       $         256     $   105

Gross Margin
 Gross margin - lots               $       2,891       $         754     $ 2,137
 Gross margin percentage - lots               39 %                38 %         1  %

 Gross margin - homes              $         860       $         473     $   387
 Gross margin percentage - homes              20 %                31 %       (11 )%

Gross margin - total               $       3,751       $       1,227     $ 2,524
Gross margin percentage - total               32 %                35 %        (3 )%

Segment Results of Operations

The year over year first quarter segment net loss before income taxes decreased by $634,000 from 2012 to 2013. There was an increase in the gross margin of approximately $2.5 million generated by the sale of lots and homes at UCP due to the higher volume of lots and homes sold in the first quarter of 2013 as compared to the first quarter of 2012. However, this increased gross margin was offset by an increase in operating costs of $2.1 million in the first quarter of 2013 as compared to the first quarter of 2012. The increase in costs is due primarily to (1) increased selling and marketing costs as a result of the increased volume of lot and home sales in the first quarter of 2013 as compared to the first quarter of 2012; and (2) increased staff and associated general and administrative costs as UCP continues to expand its operations.


                            AGRIBUSINESS OPERATIONS
                                    Three Months Ended
Thousands of dollars                    March 31,
                                     2013          2012       Change
Revenue:
Sales of canola oil and meal     $    39,556                $ 39,556
 Other                                     9     $   27          (18 )
Total revenue                         39,565         27       39,538

Costs and expenses:
Cost of canola oil and meal sold     (40,605 )               (40,605 )
. . .
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