AMREP Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 31, 2015. The filing was signed March 17, 2015. AMREP operated through Fulfillment Services, Staffing Services and Real Estate operations. On February 9, 2015, it sold its Product Packaging and Fulfillment Services and Newsstand Distribution Services businesses, which were classified as discontinued operations as of January 31, 2015.
Financial performance and position
| Metric | Three months ended Jan. 31, 2015 | Three months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2015 | Nine months ended Jan. 31, 2014 |
|---|---|---|---|---|
| Continuing-operations revenue | $16.1 million | $20.3 million | $47.7 million | $55.7 million |
| Income (loss) from continuing operations | $0.2 million | $0.3 million | $(0.5) million | $(0.6) million |
| Net income (loss) | $0.2 million | $(0.01) million | $6.8 million | $(0.6) million |
| EPS from continuing operations | $0.03 | $0.04 | $(0.07) | $(0.08) |
| Net EPS | $0.03 | $0.00 | $0.85 | $(0.09) |
- Third-quarter continuing-operations revenue declined approximately 21%; first-nine-month revenue declined approximately 14%. The primary driver was a reduction in Fulfillment Services revenue.
- Third-quarter net margin was approximately 1.5%, versus approximately breakeven in the prior year. First-nine-month net income was substantially affected by a $11.2 million pretax gain from a customer settlement recorded in discontinued operations.
- First-nine-month EBITDA was $3.7 million, compared with $2.7 million in the prior-year period. EBITDA is a company-defined non-GAAP segment measure.
- Cash and cash equivalents were $15.2 million at January 31, 2015, compared with $7.5 million at April 30, 2014. Total assets were $153.2 million, down from $186.1 million.
- Net cash provided by operating activities was $11.7 million for the first nine months, compared with $0.5 million in the prior year. Continuing-operations capital expenditures were $0.7 million, and cash used in financing activities was $3.3 million.
- Total notes payable were $18.6 million, including $14.2 million owed under the related-party real estate loan and $4.3 million of other notes. The real estate loan bears interest at 8.5% and matures December 1, 2017.
- Real estate inventory was $68.7 million at January 31, 2015. Shareholders’ equity was $90.4 million, compared with $79.3 million at April 30, 2014.
Segment and margin developments
- Fulfillment Services: Revenue decreased to $10.8 million in the quarter and $34.5 million for nine months, from $15.8 million and $44.8 million, respectively. Management cited client losses, declining magazine subscriptions, industry disruption from new media, pressure on publishers and pricing competition. Segment EBITDA declined to $0.5 million for the quarter and $3.0 million for nine months, from $2.4 million and $4.5 million.
- Staffing Services: Revenue increased to $3.2 million in the quarter and $7.8 million for nine months. The segment generated $0.1 million of nine-month EBITDA versus a small loss in the prior year.
- Real Estate: Land-sale revenue increased to $1.9 million in the quarter and $4.8 million for nine months. Average gross profit percentage on land sales was 55.8% for the quarter and 32.1% for nine months, versus 3.0% and 9.7% in the comparable periods. Results can vary materially based on the timing and mix of transactions.
Material changes and unusual items
- AMREP sold the Company Group for $2.0 million of consideration, consisting of $0.4 million cash and a $1.6 million secured promissory note. Management expected to recognize a pretax gain of approximately $9 million to $10 million in the fourth quarter of fiscal 2015.
- The discontinued businesses had $11.5 million of pretax income for the first nine months, including the $11.2 million Bauer settlement gain, compared with a $0.1 million pretax loss in the prior year.
- Under the Bauer settlement, AMREP issued 825,000 common shares valued at $4.3 million, approximately 10.3% of post-issuance shares. The settlement also transferred $22.6 million of receivables and released $38.2 million of related payables, subject to specified conditions.
- The Fulfillment Services business recorded a $0.9 million non-cash impairment charge in the first quarter for discontinued software development.
- AMREP entered into an oil and gas lease covering approximately 55,000 acres. It received approximately $1.0 million upfront, is recognizing that amount over the lease term, and had $0.8 million of deferred revenue remaining at January 31, 2015. No royalties had been received through the reporting date.
Liquidity, outlook and risks
- The PNC Credit Facility matured May 12, 2015. Following the February 9 amendment, its maximum availability was reduced from $15.0 million to $7.5 million. At January 31, 2015, availability for borrowers other than the sold Company Group was $3.8 million; the disclosed interest rate was 3.17%.
- Management reported compliance with the covenants of the PNC facility and the AMREP Southwest real estate loan at January 31, 2015.
- The Company Group retained substantially all pre-closing assets, liabilities and obligations, including the Anderson News litigation liabilities. The sold businesses had $11.5 million of assets and $20.4 million of liabilities classified as held for sale at January 31, 2015, including $13.2 million of negative working capital associated with Kable Distribution.
- Management expected Fulfillment Services revenue to decline further in the first and second quarters of fiscal 2016 because of known client losses.
- AMREP retained its defined-benefit pension obligations after the sale. Accrued pension cost was $7.7 million, and $5.0 million of related obligations were secured by first-lien mortgages benefiting the PBGC.
- Key risks include continued deterioration in magazine-related markets, customer concentration and contract losses, volatility in real estate sales, refinancing and liquidity requirements, related-party debt, pension obligations, litigation, and the collectability of the buyer promissory note.
Important facts for investors to verify
- Verify the actual fourth-quarter gain from the February 9, 2015 sale and the cash received or collected under the $1.6 million buyer promissory note.
- Verify the renewal, refinancing or repayment of the PNC Credit Facility and the resulting borrowing capacity after the sale.
- Assess the sustainability of continuing-operations earnings excluding discontinued operations, the Bauer settlement, the impairment charge and volatile land-sale margins.
- Monitor Fulfillment Services customer retention and the projected fiscal 2016 revenue declines.
- Review the retained pension, litigation and other obligations of the sold businesses, including the Anderson News matter.
- Evaluate the related-party real estate loan, collateral coverage, maturity terms and required application of land-sale and royalty proceeds.