AMREP Corporation — Form 10-Q Summary
Business context and reporting period
AMREP Corporation operates through two continuing segments: Fulfillment Services and Real Estate Operations. This quarterly report covers the three months ended July 31, 2015, which the company identifies as the first quarter of fiscal 2016. The filing is unaudited.
Newsstand Distribution Services, Product Packaging and Fulfillment Services, and Staffing Services were sold during 2015 and are presented as discontinued operations. Prior-period results were reclassified accordingly.
Key financial metrics
| Metric | Three months ended July 31, 2015 | Three months ended July 31, 2014 |
|---|---|---|
| Continuing-operations revenue | $9.575 million | $12.321 million |
| Loss from continuing operations | $1.179 million | $0.636 million |
| Loss per share from continuing operations | $0.15 | $0.08 |
| Net income (loss) | $(1.179) million | $6.264 million |
| Net income (loss) per share | $(0.15) | $0.82 |
| Net cash provided by (used in) operating activities | $(3.414) million | $2.490 million |
| Capital expenditures | $0.082 million | $0.377 million |
Continuing-operations net loss margin was approximately 12.3%, compared with approximately 5.2% in the prior-year quarter. Consolidated EBITDA, as defined by the company, was $(0.779) million versus $1.098 million.
- Fulfillment Services: Revenue was $9.181 million, down from $11.909 million. Segment net loss was $0.776 million and EBITDA was $(0.349) million.
- Real Estate: Land-sale revenue was $0.110 million, down from $0.384 million. The segment recorded a $0.766 million net loss and EBITDA of $(0.526) million. Land-sale gross margin increased to 68% from 42%, reflecting the mix and timing of transactions.
- Cash and liquidity: Cash and cash equivalents were $9.697 million at July 31, 2015, down from $12.050 million at April 30, 2015. Total assets were $135.101 million and shareholders’ equity was $92.157 million.
- Debt: Total notes payable were $17.839 million, including $13.782 million owed under the related-party real estate loan and $4.057 million under other mortgage notes.
- Pension: Accrued pension cost was $11.513 million. The company reported no additional pension payment requirement from the first-quarter property appraisal process.
Material changes versus the prior comparable period
- Revenue declined 22.3%, primarily because Fulfillment Services revenue fell $2.728 million. A significant customer changed fulfillment providers, reducing revenue by $1.438 million, largely related to termination fees recorded in the prior period.
- Fulfillment operating expenses decreased 6.5% to $8.780 million, reflecting lower payroll, benefits, facilities, and equipment costs.
- General and administrative expense for Fulfillment Services decreased to $0.865 million from $1.107 million, while real estate and corporate general and administrative expense increased to $1.019 million from $0.827 million, principally because corporate assumed pension expense associated with discontinued operations.
- The prior-year quarter included a $0.925 million impairment charge related to discontinued software development; no comparable impairment was recorded in 2015.
- The prior-year quarter included $6.900 million of after-tax income from discontinued operations, including a $11.155 million pretax settlement gain. No discontinued-operation income was recorded in the current quarter.
- Operating cash flow changed from $2.490 million provided to $3.414 million used. The current-period use included $2.434 million of cash used for taxes receivable and payable, compared with negligible cash impact in the prior-year period.
- The PNC revolving credit facility expired on August 12, 2015. It had no borrowings outstanding at July 31, 2015, and the company reported covenant compliance at quarter-end.
Guidance, outlook, risks, contingencies, and unusual items
- The filing provides no quantitative revenue, earnings, or cash-flow guidance.
- Management reports continued pressure on magazine publishers from digital media, alternative distribution technologies, weaker advertising, higher paper and printing costs, increased postal rates, lower subscription sales, title closures, and customer efforts to obtain more favorable fulfillment terms.
- Management states that continued adverse Fulfillment Services conditions could result in additional impairment charges related to long-lived assets.
- The related-party real estate loan bears interest at 8.5%, matures December 1, 2017, and is secured by substantially all AMREP Southwest real property and a subsidiary stock pledge. Principal reductions are required from specified real-estate sale proceeds and oil-and-gas royalties.
- No oil-and-gas royalties were received during the quarter. Approximately $57,000 of related revenue was recognized, with $0.701 million remaining as deferred revenue at July 31, 2015.
- A significant Fulfillment Services customer represented $1.230 million, or 12.8%, of total quarterly revenue. Accounts receivable from that customer were $0.433 million at August 31, 2015.
- The company disclosed a previously identified material weakness involving complex and non-routine transactions. Remediation efforts are ongoing, and management had not yet concluded that the weakness was remediated.
- The company estimates $58,000 of gross unrecognized tax benefits at July 31, 2015 and believes the related liability is unlikely to change over the following twelve months.
Most important facts for investors to verify
- Whether Fulfillment Services customer losses and broader publishing-industry pressures continue to reduce revenue and margins.
- Whether operating cash flow improves from the current $3.414 million use and whether the $9.697 million cash balance is sufficient for ongoing needs.
- The refinancing or repayment plan for the $13.782 million related-party loan maturing in December 2017.
- The effect of the PNC facility’s expiration on Fulfillment Services liquidity and working-capital funding.
- Potential future impairment charges on Fulfillment Services long-lived assets.
- Progress toward remediation of the previously identified internal-control material weakness.
- The timing and variability of real-estate land sales, oil-and-gas royalties, and related debt paydowns.