AMREP Corporation — Form 10-Q Summary
Business context and reporting period
AMREP Corporation operates Media Services businesses—subscription fulfillment, newsstand distribution, product packaging, fulfillment and staffing—and a New Mexico real estate business. This Form 10-Q covers the fiscal second quarter and six months ended October 31, 2014. The interim financial statements are unaudited.
Financial performance and key metrics
| Metric | Three months ended October 31, 2014 | Three months ended October 31, 2013 | Six months ended October 31, 2014 | Six months ended October 31, 2013 |
|---|---|---|---|---|
| Revenue | $19.338 million | $22.763 million | $37.266 million | $43.272 million |
| Net income (loss) | $0.254 million | $0.052 million | $6.518 million | $(0.635) million |
| EPS, basic and diluted | $0.03 | $0.01 | $0.83 | $(0.09) |
| Operating cash flow | Not separately provided | Not separately provided | $8.970 million | $2.221 million |
| Capital expenditures | Not separately provided | Not separately provided | $0.586 million | $0.204 million |
Second-quarter net margin was approximately 1.3%; the six-month net margin was approximately 17.5%, substantially affected by the non-cash settlement gain. Media Services operating expenses were 80.5% of Media Services revenue in the quarter and 81.8% for the six-month period, compared with 82.5% and 84.9%, respectively, in the prior-year periods.
- Revenue mix: Media Services revenue was $16.784 million for the quarter and $34.300 million for six months. Real estate land-sale revenue was $2.513 million and $2.897 million, respectively.
- Segment EBITDA: Consolidated EBITDA, as defined by the Company, was $1.700 million for the quarter and $2.744 million for six months, compared with $1.514 million and $1.812 million in the prior-year periods.
- Cash and assets: Cash and cash equivalents were $22.054 million at October 31, 2014, compared with $12.929 million at April 30, 2014. Total assets were $156.650 million.
- Debt: Notes payable totaled $21.345 million, including $2.804 million due within one year, $4.123 million due beyond one year and $14.418 million owed under the related-party real estate loan.
- Liquidity: The $15.0 million Media Services revolving credit facility had $2.582 million outstanding and $7.842 million of borrowing availability at October 31, 2014. The facility matures May 12, 2015; the Company reported compliance with applicable covenants.
- Working capital: Kable Distribution had negative working capital of approximately $12.672 million, down from approximately $27.863 million at April 30, 2014.
Material changes versus the prior comparable periods
- Quarterly revenue declined 15.0%, while six-month revenue declined 13.9%, primarily because of lower Media Services activity.
- Subscription Fulfillment Services revenue declined 21.2% for the quarter and 18.0% for six months. Newsstand Distribution Services revenue declined 30.0% and 31.1%, respectively. Product Packaging and Fulfillment Services and Staffing revenue declined 22.0% and 12.3%.
- Real estate land-sale revenue increased 110.1% for the quarter and 103.4% for six months, although the average gross profit percentage on land sales declined to 12.9% for the quarter and 16.8% for six months from 16.5% in both prior-year periods.
- Six-month results included an $11.155 million non-cash gain from a settlement with Heinrich Bauer (USA) LLC and a $0.925 million impairment charge related to discontinued software development. Excluding these unusual items, the six-month operating result remained a loss before other income.
- The Bauer settlement transferred $22.626 million of related receivables to Bauer, released $38.214 million of related payables, and required AMREP to issue 825,000 common shares valued at $4.274 million. The shares represented approximately 10.3% of outstanding shares after issuance.
- Receivables declined from $43.497 million at April 30, 2014 to $14.026 million, and accounts payable and accrued expenses declined from $74.636 million to $33.497 million, principally due to the settlement.
- AMREP Southwest entered an oil and gas lease covering approximately 55,000 surface acres. It received approximately $1.010 million upfront, with $0.872 million deferred at October 31, 2014 and recognized over the initial four-year lease term. The lease does not require the lessee to drill wells.
Outlook, commentary, risks and contingencies
- Management expects Subscription Fulfillment Services revenue to decline further beginning in the third fiscal quarter as services cease for certain significant clients changing service providers.
- Management cited continuing industry pressure from new media, alternative content-distribution technologies, weak advertising, higher paper, printing and postal costs, reduced magazine sales, title closures and customer demands for more favorable contract terms.
- Product Packaging and Fulfillment Services and Staffing revenue was adversely affected by a major customer moving certain business in-house.
- Newsstand Distribution depends on estimates of magazine returns and trade credits. The quarter included a $0.900 million reversal of a prior doubtful-account reserve; such estimates may affect future results.
- The related-party real estate loan bears interest at 8.5%, matures December 1, 2017, and is secured by AMREP Southwest real property with a stated book value of approximately $66.954 million. Twenty-five percent of qualifying real estate sale proceeds and oil-and-gas royalties must be applied to the loan.
- Contractual obligations totaled $25.496 million, including $21.345 million of notes payable, $1.566 million of operating leases and $2.585 million of other obligations. The latter includes $2.527 million potentially subject to return to the State of Florida.
- The Company’s defined benefit pension obligations include $5.019 million secured by real-property mortgages. Additional contributions may be required depending on property appraisals, investment returns and discount rates.
- The Company identified no material change in internal control over financial reporting and concluded that disclosure controls were effective as of October 31, 2014.
Most important facts for investors to verify
- Whether the expected loss of Subscription Fulfillment clients produces the projected revenue decline and whether cost reductions can offset the impact.
- The sustainability of Media Services margins after the one-time $0.900 million reserve reversal and the effects of continuing magazine-industry pressure.
- The non-recurring nature of the $11.155 million Bauer settlement gain and the economic impact of the 825,000-share issuance and amended customer contracts.
- The maturity and refinancing prospects of the Media Services Credit Facility in May 2015 and the Company’s compliance with its covenants.
- The volatility and realizability of real estate inventory, land-sale margins and cash flows supporting the related-party real estate loan.
- Potential obligations associated with the Florida grant repayment, pension funding, magazine-return estimates, tax positions and other contingencies.