AMREP Corporation: Q1 FY2017 Form 10-Q Summary
Business Context and Reporting Period
AMREP Corporation operates primarily through two segments: real estate, conducted by AMREP Southwest, and fulfillment services, conducted by Palm Coast Data. This filing covers the three months ended July 31, 2016, the company’s first quarter of fiscal 2017, compared with the three months ended July 31, 2015. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $12.208 million | $9.575 million | Up $2.633 million |
| Operating income before taxes | $967,000 | $(1.904) million | Improved $2.871 million |
| Net income (loss) | $630,000 | $(1.179) million | Improved $1.809 million |
| Basic and diluted EPS | $0.08 | $(0.15) | Improved $0.23 |
| Operating cash flow | $3.228 million | $(3.414) million | Improved $6.642 million |
| Capital expenditures | $39,000 | $82,000 | Down $43,000 |
Revenue increased approximately 27.5%, while net profit margin was approximately 5.2%, compared with a net loss margin of approximately 12.3% in the prior-year quarter. EBITDA, as defined by the company, was $1.558 million versus negative $779,000.
- Fulfillment services revenue was $7.828 million, down from $9.181 million. Segment operating loss improved to $42,000 from $776,000.
- Real estate revenue was $4.370 million, up from $168,000. Segment net income from operations was $247,000 versus a $766,000 loss.
- Land sales totaled $2.720 million on 14.1 acres, compared with $110,000 on 10.2 acres. The average gross profit percentage declined to 5% from 68% because the current-period sales mix was primarily lower-margin developed lots.
- Other revenue was $1.660 million, including a $1.496 million pretax gain from selling a retail commercial property.
- Interest expense decreased to $224,000 from $379,000 due to a lower average loan balance. The effective tax rate was 34.9%, compared with 38.1% in the prior-year quarter.
Liquidity, Balance Sheet, and Debt
- Cash and cash equivalents were $11.295 million at July 31, 2016, compared with $14.562 million at April 30, 2016. The quarterly decrease was $3.267 million.
- Total assets were $114.275 million, down from $120.628 million. Shareholders’ equity increased to $83.531 million from $82.844 million.
- Real estate inventory declined to $59.715 million from $61.663 million, primarily because of land sales. Investment assets declined to $9.716 million from $10.326 million after the retail property sale.
- Total notes payable declined to $6.483 million from $12.939 million. The remaining principal consisted of an $8.5% related-party real estate loan due December 1, 2017.
- The related-party loan is secured by substantially all AMREP Southwest real property in Rio Rancho and a subsidiary stock pledge. Collateralized real property had a book value of approximately $57.413 million at July 31, 2016. The company reported compliance with loan covenants.
- Operating cash flow benefited from a $2.557 million reduction in real estate inventory and investment assets. Financing activities used $6.456 million, including $6.796 million of principal repayments.
- Accrued pension cost was $13.025 million. The company had secured $5.019 million of pension-related obligations with first-lien mortgages and reported no additional pension payment requirement during the quarter.
Material Changes, Outlook, Risks, and Unusual Items
- The fulfillment-services business experienced lower customer volumes, price concessions, and lost business. Magazine publishers continue to face competition from new media, weaker advertising, higher paper and printing costs, and higher postal rates.
- A major fulfillment-services customer represented 10.5% of total company revenue in the quarter and notified the company that a significant portion of its business would transfer to another provider during 2017. The filing does not quantify the expected revenue loss.
- The $1.496 million property-sale gain materially benefited current-quarter results and is not necessarily recurring.
- Real estate results remain dependent on the timing, location, type, and margin mix of land transactions; management states that historical period-to-period results are not necessarily indicative of future results.
- The company held approximately 12,000 acres of New Mexico land classified as long-term investment at July 31, 2016. No oil and gas royalties were received during the quarter, although $57,000 of lease revenue was recognized and $474,000 of deferred revenue remained.
- The U.S. Bank loan associated with the sold retail property was satisfied with sale proceeds during the quarter.
- Management provided no quantitative earnings or revenue guidance. Forward-looking risks include customer attrition, future business conditions, land-sale timing, accounting-standard adoption, and unrecognized tax benefits.
- The filing states that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Assess the revenue and earnings impact of the major fulfillment-services customer transferring business during fiscal 2017.
- Separate recurring operating performance from the $1.496 million property-sale gain and evaluate the sustainability of land-sale volumes and margins.
- Review the December 2017 maturity, 8.5% interest rate, collateral, related-party nature, and repayment requirements of the AMREP Southwest loan.
- Monitor cash balances and operating cash flow after the $6.796 million quarterly debt repayment.
- Evaluate fulfillment-services exposure to declining magazine subscriptions, customer concentration, pricing pressure, and industry disruption.
- Review pension funding requirements, property valuations securing the PBGC obligations, and the potential impact of future appraisal shortfalls.
- Track adoption plans and potential effects of the new lease and revenue-recognition accounting standards; the filing does not provide estimated impacts.