AMREP Corporation — Form 10-Q Summary
Business Context and Reporting Period
AMREP operates through two principal segments: real estate, including residential land development and sales in New Mexico, and fulfillment services through Palm Coast Data. This filing covers the fiscal second quarter and first six months ended October 31, 2018, corresponding to fiscal 2019. Amounts are in thousands unless otherwise stated.
Key Financial Metrics
| Metric | Three Months Ended October 31, 2018 | Three Months Ended October 31, 2017 | Six Months Ended October 31, 2018 | Six Months Ended October 31, 2017 |
|---|---|---|---|---|
| Revenue | $9,608 | $9,175 | $21,323 | $20,501 |
| Income before taxes | $8 | $363 | $17 | $2,577 |
| Net income | $55 | $278 | $116 | $1,726 |
| EPS, basic and diluted | $0.00 | $0.03 | $0.01 | $0.21 |
| EBITDA | $301 | $695 | $602 | $3,243 |
| Net margin | 0.6% | 3.0% | 0.5% | 8.4% |
Quarterly revenue increased approximately 5%, while six-month revenue increased approximately 4%. Profitability declined substantially because of lower fulfillment-services earnings, lower land-sale margins, and the absence of a prior-year settlement gain.
- Fulfillment-services revenue was $6,941 for the quarter and $14,386 for six months, compared with $7,673 and $14,916, respectively, in the prior-year periods.
- Real estate revenue was $2,367 for the quarter and $6,548 for six months, compared with $1,416 and $4,093, respectively.
- New Mexico land-sale gross profit percentage before indirect costs declined to 9% for the quarter and 10% for six months, compared with 20% and 19% in the prior-year periods.
- Cash flow used in operating activities was $217 for the six months, compared with $2,047 provided in the prior-year period.
- Cash and cash equivalents were $13,993 at October 31, 2018, compared with $14,041 at April 30, 2018.
- Net cash provided by financing activities was $118, consisting of $1,335 of debt proceeds, $1,171 of principal payments, and $46 of debt issuance costs.
- Capital expenditures were $34 for six months, compared with $29 in the prior-year period.
Balance Sheet, Debt, and Liquidity
| Balance Sheet Item | October 31, 2018 | April 30, 2018 |
|---|---|---|
| Total assets | $104,618 | $105,670 |
| Real estate inventory | $58,968 | $58,874 |
| Notes payable, net | $1,972 | $1,843 |
| Total liabilities | $16,852 | $18,540 |
| Shareholders’ equity | $87,766 | $87,130 |
| Accrued pension costs | $6,970 | $9,051 |
Liquidity primarily comes from operating cash flow, project-specific bank financing, and existing cash. The company made a $2,000 pension contribution during the six months, contributing to negative operating cash flow. The company reported compliance with applicable debt covenants at October 31, 2018.
- The Lomas Encantadas loan had outstanding principal of $2,009 at October 31, 2018, with a $4,750 borrowing capacity and maturity in December 2021. Principal payments during the six months totaled $1,171.
- The Hawk Site loan had outstanding principal of $42 at October 31, 2018, with a $1,800 borrowing capacity and maturity in July 2021. AMREP Southwest guarantees the loan.
- As of December 5, 2018, subsequent to quarter-end, outstanding principal was $1,327 for Lomas Encantadas and $582 for Hawk Site.
Material Changes Versus the Prior Comparable Period
- Six-month net income fell 93% to $116 from $1,726, and EBITDA fell 81% to $602 from $3,243.
- The prior-year six-month results included a $1,318 pre-tax gain from a Palm Coast settlement with the State of Florida; no comparable gain was recorded in 2018.
- Fulfillment-services revenue declined because of lower existing-customer volumes, contract price concessions, lost business, and a customer insourcing a significant portion of its business in August 2018. New business partially offset these factors.
- Real estate revenue increased primarily because of higher residential land sales, but the mix shifted toward developed lots with lower gross margins.
- Operating cash flow shifted from a $2,047 source to a $217 use, primarily reflecting the $2,000 pension contribution and lower earnings.
- Accrued pension costs declined by $2,081, and the company stated that its agreements with the PBGC terminated in August 2018, releasing the company and controlled-group members from claims under those agreements.
- The company adopted ASC Topic 606 for revenue recognition effective May 1, 2018 using the modified retrospective method; management reported no impact on results of operations.
- Prior-period balances were revised, including a $523 increase to retained earnings and reductions to deferred taxes and accounts payable. Management considered the revisions immaterial.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal revenue, earnings, or margin guidance. Management states that future results may vary significantly based on the timing and mix of land transactions, selling prices, development activity, customer volumes, contract renewals, and industry conditions.
- Fulfillment services face structural pressure from digital media, alternative distribution technologies, weaker publishing advertising markets, higher paper and printing costs, higher postal rates, subscription declines, and customer pricing pressure.
- Real estate results are sensitive to the type, location, and timing of land sales; developed lots generated lower margins than undeveloped lots during the reported periods.
- The company had not completed its accounting for the Tax Cuts and Jobs Act as of October 31, 2018 and expected completion during the quarter ending January 31, 2019. Deferred tax balances could change.
- Gross unrecognized tax benefits totaled $58, with recognition expected during the quarter ending January 31, 2019 due to expiration of the statute of limitations.
- The company extended an oil and gas lease to September 2020 without an extension fee. No royalties were received during the reported periods, and no deferred revenue remained under the lease at October 31, 2018.
- Operating lease accounting, certain tax-effect reclassifications, and nonemployee share-based payment standards are scheduled for future adoption; management did not expect material effects from the latter two and had not concluded the impact of the lease standard.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether fulfillment-services customer losses, insourcing, and contract pricing pressure continue to reduce revenue and EBITDA.
- The sustainability and margin profile of New Mexico residential land sales, including the pace of lot sales and development spending.
- Operating cash flow after required pension contributions and real estate development expenditures.
- Outstanding balances, borrowing availability, maturities, interest rates, collateral, guarantees, and covenant compliance for the Lomas Encantadas and Hawk Site loans.
- Final accounting effects of the Tax Cuts and Jobs Act and resolution of the $58 unrecognized tax benefit.
- Potential effects of future lease accounting adoption and other pending accounting standards.
- The impact of the prior-period revisions and the company’s revised financial statement presentation.