AMREP Corporation — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the fiscal third quarter and first nine months ended January 31, 2016, with comparisons to the periods ended January 31, 2015. AMREP operates primarily through two continuing segments: Fulfillment Services and Real Estate Operations. The Newsstand Distribution, Product Packaging and Fulfillment, and Staffing Services businesses were sold in 2015 and are classified as discontinued operations.
The filing was signed March 15, 2016. The company had 8,059,454 common shares outstanding as of February 29, 2016.
Financial performance and key metrics
| Metric | Three months ended January 31, 2016 | Three months ended January 31, 2015 | Nine months ended January 31, 2016 | Nine months ended January 31, 2015 |
|---|---|---|---|---|
| Revenue | $12.2 million | $13.2 million | $33.0 million | $39.9 million |
| Loss from continuing operations | $0.6 million | $0.3 million | $2.4 million | $1.0 million |
| Net income (loss) | $(0.6) million | $(0.3) million | $(2.4) million | $6.2 million |
| Continuing-operations loss per share | $(0.07) | $(0.04) | $(0.30) | $(0.13) |
| Net margin | (4.7%) | (2.3%) | (7.3%) | 15.6% |
| Cash flow from continuing operating activities | Not separately provided | Not separately provided | $(1.2) million | $10.7 million |
Third-quarter revenue declined 7.7%, while nine-month revenue declined 17.3%. Fulfillment Services revenue fell 19.1% in the quarter and 22.8% year to date. Real estate land-sale revenue increased 71.8% in the quarter and 15.3% year to date.
Land-sale gross margin decreased to 13.0% in the quarter and 14.4% for the nine months, compared with 55.8% and 32.1%, respectively, in the prior-year periods, primarily because of the mix and profitability of lots sold.
Segment EBITDA was $0.3 million in the quarter and $(0.6) million for the nine months. Fulfillment Services generated quarterly EBITDA of $0.2 million but nine-month EBITDA of $(0.1) million; Real Estate Operations generated EBITDA of $(0.2) million in the quarter and $(1.0) million year to date.
Balance sheet, cash flow, debt and liquidity
| Balance-sheet item | January 31, 2016 | April 30, 2015 |
|---|---|---|
| Cash and cash equivalents | $13.9 million | $12.1 million |
| Total assets | $133.0 million | $138.7 million |
| Real estate inventory | $63.6 million | $66.3 million |
| Total debt and notes payable | $16.8 million | $18.1 million |
| Total liabilities | $42.1 million | $45.4 million |
| Shareholders’ equity | $90.9 million | $93.3 million |
Cash increased $1.8 million during the first nine months, despite $1.2 million of negative operating cash flow. Investing cash flow was positive $2.9 million, including $2.0 million from a line-of-credit receivable and $1.6 million from a buyer promissory note, partly offset by $0.7 million of capital expenditures. Financing cash flow was positive $0.1 million after $1.3 million of principal repayments.
The largest borrowing was a $12.5 million related-party real estate loan bearing 8.5% interest and maturing December 1, 2017. It is secured by AMREP Southwest’s Rio Rancho real property and subsidiary stock. A $4.0 million warehouse mortgage was paid in full after the warehouse was sold in February 2016. A U.S. Bank construction loan had an outstanding balance of $0.3 million at January 31, 2016 and a maximum commitment of $0.9 million.
Management stated that AMREP Southwest was in compliance with the related-party loan covenants at January 31, 2016. The PNC revolving facility supporting Fulfillment Services expired August 12, 2015 with no borrowings outstanding.
Material changes, outlook and risks
- Fulfillment Services results were pressured by declining magazine publishing activity, competition from digital media, lower subscription sales, provider changes, and customer demands for more favorable terms.
- A major Fulfillment Services customer, representing 10.6% of third-quarter revenue and 12.4% of nine-month revenue, notified the company that it will discontinue certain services beginning in the second quarter of fiscal 2017. Management expects revenue from this customer could decline by more than 50% from current levels.
- The prior-year nine-month results included a $11.2 million pretax settlement gain in discontinued operations. This gain drove the prior-year $6.2 million net income and makes the current-year comparison unfavorable.
- The prior-year nine-month results also included a $0.9 million impairment charge related to discontinued software development; no comparable charge was recorded in 2016. Management warned that continued adverse Fulfillment Services conditions could result in future long-lived-asset impairment charges.
- The Fairfield, Ohio warehouse was sold in February 2016. The related mortgage was paid in full, and the company expects to recognize a pretax gain of approximately $0.3 million in the quarter ending April 30, 2016.
- The company received a $1.1 million federal tax refund in February 2016. The remaining $0.7 million taxes-receivable balance is expected to be recoverable through carryback of current-year tax losses.
- No oil and gas royalties were received during the first nine months. Approximately $0.6 million of deferred lease revenue remained to be recognized at January 31, 2016.
- The company continues to remediate a previously identified material weakness involving controls over complex and non-routine transactions. Management stated that disclosure controls were effective, but the material weakness was not yet considered remediated.
- No formal earnings or revenue guidance was provided. Management’s outlook remains subject to customer losses, industry weakness, land-sale timing and mix, possible impairment charges, tax recoverability, and other forward-looking contingencies.
Most important facts for investors to verify
- Whether the major Fulfillment Services customer’s planned service reductions produce the expected revenue decline beginning in fiscal 2017.
- The company’s ability to generate positive operating cash flow while carrying substantial real estate inventory and pension obligations.
- Refinancing or repayment capacity for the $12.5 million related-party loan maturing in December 2017.
- Completion and accounting impact of the Fairfield warehouse sale, including the expected $0.3 million pretax gain.
- Progress toward remediation of the material weakness in internal control over financial reporting.
- The recoverability of taxes receivable and the potential for additional impairment charges in Fulfillment Services.
- The timing, volume and margins of future New Mexico land sales, which can vary materially by transaction and property mix.