AMREP Corporation — Form 10-Q Summary
Business context and reporting period
AMREP operates primarily through two segments: real estate and fulfillment services. This quarterly report covers the three and six months ended October 31, 2017, representing the second quarter and first six months of fiscal 2018. Comparisons are with the corresponding periods ended October 31, 2016. Amounts are in thousands unless otherwise stated.
Financial performance and position
| Metric | Three months ended Oct. 31, 2017 | Three months ended Oct. 31, 2016 | Six months ended Oct. 31, 2017 | Six months ended Oct. 31, 2016 |
|---|---|---|---|---|
| Revenue | $9,175 | $11,465 | $20,501 | $23,673 |
| Income before taxes | $363 | $120 | $2,577 | $1,087 |
| Net income | $278 | $112 | $1,726 | $742 |
| Net margin | 3.0% | 1.0% | 8.4% | 3.1% |
| Basic and diluted EPS | $0.03 | $0.01 | $0.21 | $0.09 |
| Net cash from operating activities | Not separately provided | Not separately provided | $2,047 | $6,677 |
- Fulfillment services revenue was $7,673 for the quarter and $14,916 for the six months, down from $7,858 and $15,686, respectively. Fulfillment-services EBITDA was $1,439 for the quarter and $3,621 for the six months, including the Florida settlement gain in the six-month period.
- Real estate revenue was $1,416 for the quarter and $4,093 for the six months, compared with $3,529 and $6,249. Real estate land-sale gross profit margins were approximately 20% for the quarter and 42% for the six months.
- Cash and cash equivalents increased to $13,829 at October 31, 2017 from $11,811 at April 30, 2017. Total assets were $107,022 and shareholders’ equity was $86,709.
- Real estate inventory was $55,930, down modestly from $56,090 at April 30, 2017. Receivables were $6,378.
- The balance sheet does not present a current debt balance. No debt proceeds or principal payments were recorded during the first six months of fiscal 2018. Interest expense was $31, compared with $306 in the prior-year period.
- Accrued pension cost was $10,827. The company had remaining liabilities of approximately $1,243 related to the Florida settlement and $262 of deferred gain to recognize over approximately seven and a half years.
- Capital expenditures were $29 for the six months, compared with $49 in the prior-year period.
Material changes versus the prior comparable period
- Quarterly revenue decreased 20.0%, primarily because of lower real estate land sales; six-month revenue decreased 13.4%.
- Quarterly net income increased 148%, and six-month net income increased 133%, despite lower revenue. The improvement reflected lower fulfillment operating costs, lower interest expense, improved real estate land-sale margins and the absence of certain prior-year costs.
- The six-month period included a $1,318 pre-tax gain from Palm Coast’s settlement with the State of Florida. The prior-year six-month period included a $1,496 pre-tax gain on the sale of a retail commercial building. These unusual items affect period-to-period comparability.
- Fulfillment operating and selling expenses declined to $5,983 for the quarter and $12,077 for the six months, primarily due to lower payroll and benefits and other volume-related costs.
- Real estate operating and selling expenses increased to $582 for the quarter and $1,093 for the six months, due primarily to employee costs, land maintenance and broker commissions.
- Other liabilities and deferred revenue declined to $1,756 from $3,376 at April 30, 2017, primarily due to the Florida settlement.
Guidance, outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided.
- A major fulfillment-services customer represented approximately 10.6% of total company revenue for the first six months and notified Palm Coast that a significant portion of its business would transfer away during 2018. This is an important forward-looking revenue risk.
- Management cited continuing pressure on magazine publishers from digital media, alternative distribution technologies, weaker advertising, higher paper and printing costs, and increased postal rates. These factors may reduce subscription volumes and fulfillment demand.
- Real estate revenue and margins may vary materially based on the timing, location, type and mix of land transactions; prior results are not necessarily indicative of future periods.
- Palm Coast paid $163 related to the Florida settlement during the first quarter. The settlement produced a $1,318 pre-tax gain and left a reported liability of approximately $1,243.
- The company was evaluating adoption of the new revenue recognition standard, Topic 606, effective May 1, 2018 using the modified retrospective method. Management had not yet estimated its quantitative impact.
- The company had $58 of gross unrecognized tax benefits and believed the related liability was unlikely to change during the following twelve months.
- Management reported that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor verification points
- Verify the timing and magnitude of the expected loss of the major fulfillment-services customer and its effect on 2018 revenue, margins and cash flow.
- Separate recurring operating performance from the $1,318 Florida settlement gain and compare it with the $1,496 prior-year property-sale gain.
- Assess the sustainability and timing of real estate land sales, including the $55,930 real estate inventory balance.
- Confirm the remaining Florida settlement liability, deferred gain recognition and any related cash payments.
- Review the company’s implementation conclusions and ultimate impact of Topic 606.
- Evaluate pension funding requirements, including the $10,827 accrued pension cost and property-collateral requirements in favor of the PBGC.