AMREP Corporation — Form 10-Q Summary
Business context and reporting period
AMREP operates two primary segments: real estate, through AMREP Southwest, and fulfillment services, through Palm Coast Data and affiliates. The filing covers the three months ended July 31, 2018, the first quarter of fiscal 2019, with comparison to the three months ended July 31, 2017. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $11.715 million | $11.326 million |
| Income before taxes | $9,000 | $2.214 million |
| Income tax benefit/(expense) | $52,000 benefit | $766,000 expense |
| Net income | $61,000 | $1.448 million |
| Basic and diluted EPS | $0.01 | $0.18 |
| Net cash provided by operating activities | $784,000 | $1.315 million |
| Cash and cash equivalents at period-end | $15.100 million | $13.116 million |
Revenue increased 3.4% year over year. Net income margin declined to approximately 0.5% from 12.8%, while pretax margin declined to approximately 0.1% from 19.5%. The filing does not present a consolidated gross margin. Consolidated EBITDA, as defined by the Company, was $305,000 versus $2.548 million.
- Fulfillment services revenue was $7.445 million, compared with $7.243 million; segment net income was $195,000 versus $1.040 million, and EBITDA was $807,000 versus $2.182 million.
- Real estate revenue was $4.181 million, compared with $2.677 million; segment net loss was $511,000 versus net income of $180,000, and EBITDA was $(81,000) versus $856,000.
- Real estate inventory was $59.174 million at July 31, 2018, compared with $58.874 million at April 30, 2018.
- Notes payable, net totaled $2.071 million, compared with $1.843 million at April 30, 2018. Interest expense was $5,000 versus $13,000.
- Total liabilities were $19.688 million and shareholders’ equity was $87.031 million at July 31, 2018.
Material changes versus the prior comparable period
- Net income fell by $1.387 million despite higher revenue, primarily because Q1 FY2018 included a $1.318 million pretax gain from a settlement with the State of Florida. That gain was not repeated.
- Real estate land sales increased by $1.504 million. New Mexico land sales totaled $4.181 million on 12.3 acres versus $633,000 on 4.3 acres; the average gross profit percentage before indirect costs declined to 11% from 18% due to sales mix.
- Fulfillment revenue increased modestly, but operating and selling expenses rose to $6.338 million from $6.094 million, reflecting higher payroll and benefits, bad debt, supplies and outside services.
- Operating cash flow decreased by $531,000, partly reflecting the absence of the prior-year non-cash settlement gain and changes in real estate inventory and investment assets.
- Cash increased by $1.059 million during the quarter. Financing provided $224,000 net, including $1.044 million of debt proceeds, $774,000 of principal repayments and $46,000 of debt issuance costs.
- The Company adopted Topic 606 revenue recognition using the modified retrospective method. Management reported no impact on results of operations.
Outlook, commentary, risks and unusual items
- Management does not provide specific earnings or revenue guidance in the filing. Results from land sales may vary significantly based on transaction timing, location, property type and sales mix.
- A fulfillment-services customer representing approximately 9.9% of total revenue in the quarter in-sourced a significant portion of its business in August 2018. The transfer was expected but creates a near-term revenue risk.
- Fulfillment services face pressure from alternative media and distribution technologies, weaker magazine advertising and subscription sales, customer contract repricing, lost business, and higher paper, printing and postal costs.
- The Lomas Encantadas loan had $2.115 million outstanding at July 31, 2018, against a $4.750 million facility, and matures in December 2021. The Hawk Site loan had $42,000 outstanding against a $1.800 million facility and matures in July 2021. The Company reported compliance with applicable covenants.
- AMREP Southwest guaranteed the Hawk Site loan. Loan agreements contain customary default provisions that could accelerate obligations.
- The Company reported $9.011 million of accrued pension costs. Pension-related PBGC agreements terminated by their terms on August 30, 2018, after the quarter-end, with the PBGC deemed to have released the Company and controlled-group members from claims under those agreements.
- The Company received $85,000 of life insurance proceeds and recorded them as investing cash flow. It also recognized $57,000 of oil and gas lease revenue in the quarter.
- The oil and gas lease was extended on September 7, 2018 from September 2018 to September 2020, with no extension fee. The amendment provides for potential consideration tied to future mineral rights transactions and a 1% overriding royalty interest.
- Accounting for the Tax Cuts and Jobs Act was not complete as of July 31, 2018. Deferred tax balances could change; gross unrecognized tax benefits totaled $58,000 and were expected to be recognized upon expiration of the applicable statute of limitations.
- Management stated 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
- Whether the August 2018 customer insourcing materially reduced fulfillment-services revenue, margins or operating cash flow.
- The sustainability and timing of New Mexico residential land sales, including the lower 11% gross profit percentage reported for the quarter.
- The effect of the nonrecurring $1.318 million prior-year settlement gain on year-over-year comparisons.
- Available borrowing capacity, covenant compliance and repayment requirements under the Lomas Encantadas and Hawk Site facilities.
- The valuation and liquidity implications of $59.174 million of real estate inventory and the Company’s ability to convert it into cash.
- Completion of the Tax Cuts and Jobs Act accounting and recognition of the $58,000 unrecognized tax benefit.
- The effect of the PBGC agreement termination on pension obligations, collateral requirements and future cash funding.