AMREP Corporation — Form 10-Q Summary
Business context and reporting period
AMREP Corporation operates primarily through two segments: real estate operations, including land sales in New Mexico, and Fulfillment Services operated by Palm Coast Data LLC. This unaudited report covers the fiscal second quarter and first six months ended October 31, 2016, with comparisons to the periods ended October 31, 2015.
Financial performance and key metrics
| Metric | Three months ended October 31 | Six months ended October 31 |
|---|---|---|
| Revenue | $11.465 million vs. $11.221 million | $23.673 million vs. $20.796 million |
| Net income (loss) | $112,000 vs. $(676,000) | $742,000 vs. $(1.855) million |
| Basic and diluted EPS | $0.01 vs. $(0.08) | $0.09 vs. $(0.23) |
| Operating income (loss) before taxes | $120,000 vs. $(1.106) million | $1.087 million vs. $(3.010) million |
| Net margin | Approximately 1.0% vs. (6.0%) | Approximately 3.1% vs. (8.9%) |
| Operating cash flow | Not separately reported for the quarter | $6.677 million vs. $(1.894) million |
Fulfillment Services revenue declined 10.0% in the quarter and 12.4% year to date, to $7.858 million and $15.686 million, respectively. Real estate land-sale revenue increased to $3.529 million in the quarter and $6.249 million year to date, compared with $2.180 million and $2.290 million. Other revenue for the six-month period included a $1.496 million pretax gain from the sale of a retail commercial property.
Land-sale gross margin was 16.6% for the quarter and 11.6% year to date, compared with 13.7% and 16.2% in the prior-year periods. Consolidated EBITDA, a non-GAAP measure used by management for segment evaluation, was $552,000 for the quarter and $2.110 million year to date, compared with $(35,000) and $(814,000).
Cash and cash equivalents were $11.906 million at October 31, 2016, down from $14.562 million at April 30, 2016. Real estate inventory declined to $57.743 million from $61.663 million, while investment assets declined to $9.716 million from $10.326 million. Total assets were $111.816 million and shareholders’ equity was $83.678 million.
Notes payable were $3.655 million at October 31, 2016, compared with $12.939 million at April 30, 2016. The principal related-party real estate loan bears interest at 8.5% and matures December 1, 2017. It is secured by substantially all AMREP Southwest real property in Rio Rancho, New Mexico and a pledge of subsidiary stock.
Material changes versus the prior comparable period
- Revenue increased 2.2% in the quarter and 13.8% for the first six months, driven by higher land sales and the property-sale gain.
- The Company moved from losses to profitability, with year-to-date net income improving by $2.597 million.
- Fulfillment Services operating expenses fell 14.7% in the quarter and 19.6% year to date, reflecting lower payroll, benefits, supplies, consulting costs and amortization following the prior-year impairment of certain intangible assets.
- Interest expense declined to $82,000 in the quarter and $306,000 year to date, primarily because of debt reduction.
- Operating cash flow improved by $8.571 million year over year, aided by the reduction in real estate inventory and investment assets.
- Financing activities used $9.284 million of cash, including $9.624 million of principal debt payments. Capital expenditures were $49,000 year to date.
Outlook, risks, contingencies and unusual items
- A major Fulfillment Services customer representing 10.5% of total revenue for the first six months has notified the Company that a significant portion of its business will transfer to another provider during 2017.
- Fulfillment Services faces continuing pressure from new media, alternative distribution technologies, weaker magazine advertising, higher paper and printing costs, increased postal rates, reduced subscription sales and customer contract repricing.
- Real estate revenue and margins may vary materially by period because of the timing, type and location of land transactions; prior results may not indicate future performance.
- The Company held approximately 12,000 acres of New Mexico land classified as long-term investment and does not plan to develop it in the near term.
- The related-party loan requires application of 25% of net cash proceeds from certain real property sales and 25% of royalties received under an oil and gas lease. The Company reported compliance with loan covenants at October 31, 2016.
- Accrued pension cost was $13.340 million. Certain pension obligations are secured by mortgages, and additional contributions could be required if property appraisals fall below specified thresholds; no such payment was required during the first six months.
- No oil and gas royalties were received during the first six months. Approximately $417,000 of deferred lease revenue remained to be recognized at October 31, 2016.
- Management provided no quantitative earnings or revenue guidance. It cautioned that forward-looking results depend on customer retention, land development and sales timing, industry conditions, tax matters and other factors.
Important facts for investors to verify
- Timing and magnitude of the announced 2017 loss of Fulfillment Services customer business.
- Whether Fulfillment Services cost reductions can offset further revenue declines.
- Real estate sales volume, pricing, margins and cash proceeds available for debt repayment.
- Refinancing or repayment plans for the $3.655 million related-party loan maturing in December 2017.
- Sustainability of operating cash flow after the benefit of inventory and investment-asset monetization.
- Potential pension funding requirements, tax contingencies and the recoverability of deferred tax assets.
- The extent to which the six-month profit benefited from the $1.496 million property-sale gain and therefore may not recur.