As originally appeared in the Troubled Company Reporter.
PICO Holdings, Inc. (Nasdaq:PICO), based in La Jolla, Calif., is a diversified holding company reporting recurring losses since 2008. PICO owns 57% of UCP, Inc. (NYSE:UCP), 100% of Vidler Water Company, Inc., a securities portfolio and various interests in small businesses. PICO has $662 million in assets and $426 million in shareholder equity. Amundi and River Road Asset Management LLC collectively own more than 16% of PICO. Other activists at http://ReformPICONow.com/ (RPN) have taken to the Internet to advance the shareholder cause.
The bloggers recap the UCP Earnings Call. “On the Q4 Earnings Call, in his scripted remarks, Dustin Bogue, UCP CEO, said, ‘For the full year net income was a record $1.15 per share which included $0.31 of net one time benefits. Excluding one-time items Core Earnings would be $0.84 per share. Our return on equity improved to 6.5% in 2016 compared to under 3% in the prior year.’
UCP CFO James Pirrello joined the fantasy when he stated, ‘For the full year, UCP’s net income to public shareholders was $9.2 million or $1.15 per share compared to $0.30 in 2015. This earnings improvement is driving higher returns on equity which steadily trended higher over the past five quarters rising to 6.5% in Q4 2016 compared to 2.7% in the prior year.’
Mr. Pirrello digs himself further into the make-believe hole when he elaborates, ‘During the quarter we also released our valuation allowance against our deferred tax asset. The impact was a contribution of $5.5 million which provides benefits exclusively to UCP’s Class A shareholders. . . . Excluding these one-time items and the tax benefit, core EPS for the fourth quarter and full year were $0.28 and $0.84 per share and still represent record levels.’
The bloggers say there are two problems with the figures provided by Messrs. Bogue and Pirrello. First, “UCP’s ‘Core Earnings’ figure incorporates three adjustments for noncash items. Unfortunately for Messrs. Bogue and Pirrello, there were FOUR noncash items in 2016. And the noncash item these men innocently forgot to adjust had a positive effect on earnings.
“Messrs. Bogue and Pirrello do an excellent job of adding back noncash reductions to earnings per the goodwill writedown and the real estate abandonment/impairment charges. They eliminate the effect of the valuation allowance, which sharply increased net earnings. But alas, these men conveniently forgot about the noncash reduction to the contingent consideration, which positively affected consolidated net income by $2.347 million.
“We find the failure to adjust for the contingent consideration to be especially suspicious given that Messrs. Bogue and Pirrello added back the noncash negative effects of the goodwill writedown. The goodwill writedown and the reduction in contingent consideration are linked. They occurred simultaneously. You could not have one without the other. They go together like divorce and alimony.
“(We were going to say, ‘They go together like poor performance and no bonus’ — but at UCP, poor performance is rewarded with a raise, Golden Parachute fortification and a soon-to-arrive bonus.)
“Reduction of the contingent consideration reduces reduced UCP’s earnings per share figure by $.12 from $.84 to $.72, a reduction of 15%. Return on equity, which Messrs. Bogue and Pirrello say is 6.5%, is actually 5.9%.”
The bloggers now address the second discrepancy. “Messrs. Bogue and Pirrello conveniently forgot to tell analysts, shareowners and the investing public that UCP made a tiny little tax payment of $4,830 million to PICO in 2016.”
“UCP’s tax payments to PICO are ‘off-income statement.’ They do not appear on the face of the P&L. Instead, these payments are recorded in the ‘Financing Activities’ section of the Cash Flow Statement, under ‘Distribution To Noncontrolling Interest.’
“We have a question for Messrs. Bogue and Pirrello: Since when do ‘Core Earnings’ not include tax payments? This pesky little tax payment reduces UCP’s ‘Core EPS’ by a smidgen: from $.84 cents to $.13 cents, equal to an 85% reduction. Instead of the 6.5% ‘Core ROE’ trumpeted by Messrs. Bogue and Pirrello, RPN’s ‘Core ROE’ for UCP amounts to 1%.”
The bloggers state that the conduct perpetrated by Messrs. Bogue and Pirrello, and UCP in general is deteriorating. “Proper conduct seems to be slipping through these men’s hands like water. This same phenomena occurred at PICO. Certain Directors and Executives became so fearful and desperate that their conduct crashed down through one ethical level after another. Over time, it only got worse; never better. The same thing is happening at UCP.”
“We are puzzled by the antics of Messrs. Cortney, Bogue and Pirrello. We would think they would want to end the self-humiliation and self-inflicted pain and reach a harmonious solution with the owners of the business. But alas, these men flounder on. Their list of transgressions against shareowners grows and they face a stare-down with their majority owner. It will likely only get worse from here.”
The bloogers ask Messrs. Bogue, Pirrello and UCP Chairman Michael Cortney to reflect on the result at PICO. “Fourteen months ago, the PICO Board was comprised of 7 corrupt and incompetent Directors. All of them have been removed. In the process, two recently appointed self-interested directors were removed. That is a total of nine Directors removed. More impressive than the gross number is the success rate: 100%.”
“Messrs. Cortney, Bogue and Pirrello should also consider the manner in which these 9 Directors were removed. Three were thrown out in complete humiliation. These three men severely damaged their professional reputations and their future earnings power. Two others were embarrassingly tossed by their own Board (an action cheered by shareholders). Again, these two men leave with damaged reputations and diminished earnings power. The only Directors who departed PICO with their reputations and earnings power intact, did so quickly and quietly.
“Shareholders have already begun the process at UCP. Kathleen Wade will likely be ejected from the UCP Board in a few months. We feel Messrs. Cortney, Bogue and Pirrello would do well to objectively analyze the base case before them. Perhaps they will find similarities and can derive a prudent future course of action therefrom.”