AMREP Corporation — Form 10-Q Summary
Business Context and Reporting Period
AMREP operates Media Services businesses—Subscription Fulfillment, Newsstand Distribution, and Product Services and Other—and a real estate business through AMREP Southwest. This filing covers the fiscal quarter and six months ended October 31, 2012, representing fiscal 2013 second-quarter and year-to-date results. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended October 31, 2012 | Three Months Ended October 31, 2011 | Six Months Ended October 31, 2012 | Six Months Ended October 31, 2011 |
|---|---|---|---|---|
| Revenue | $21.317 million | $23.351 million | $40.913 million | $44.844 million |
| Income before taxes | $548 thousand | $1.866 million | $(411) thousand | $1.439 million |
| Net income (loss) | $276 thousand | $1.083 million | $(332) thousand | $804 thousand |
| Basic and diluted EPS | $0.05 | $0.18 | $(0.06) | $0.13 |
| EBITDA | $1.774 million | $3.560 million | $2.267 million | $4.859 million |
Quarterly net margin was approximately 1.3%, compared with 4.6% in the prior-year quarter. The six-month net margin was approximately negative 0.8%, compared with 1.8% in the prior-year period. The six-month results included a $169 thousand non-cash impairment charge on a real estate investment asset.
- Media Services revenue declined 3.4% in the quarter and 5.9% year to date. Subscription Fulfillment revenue declined to $14.456 million for the quarter and $28.058 million for six months, while Newsstand Distribution revenue declined to $2.287 million and $4.626 million, respectively. Product Services and Other increased to $4.523 million and $8.170 million.
- Media Services operating expenses declined, but represented 80.1% of related revenue in the quarter and 81.8% year to date, compared with 78.4% and 80.8% in the prior-year periods. Lower costs did not offset revenue pressure.
- No real estate land sales were recorded in either 2012 fiscal-year period, compared with $1.327 million in the prior-year quarter and $1.435 million for the prior-year six months.
- Cash and cash equivalents declined to $15.077 million at October 31, 2012 from $27.847 million at April 30, 2012. Total assets were $201.587 million and shareholders’ equity was $74.313 million.
- Net cash used in operating activities was $16.885 million for the first six months, compared with $7.630 million provided in the prior-year period. The principal uses included a $12.209 million increase in receivables and a $4.322 million reduction in accrued pension cost.
- Capital expenditures were $292 thousand year to date, compared with $697 thousand in the prior-year period. Financing activities provided $4.407 million, including $8.836 million of debt financing and $4.429 million of principal payments.
Debt and Liquidity
- Total notes payable were $25.732 million at October 31, 2012, including $5.098 million under the Media Services revolving facility, $16.214 million under the ASW Loan, and $4.420 million of other notes.
- The Media Services credit facility was amended to extend its maturity to May 12, 2014 and reduce its borrowing limit from $20 million to $15 million. Availability was $13.601 million, with $5.098 million outstanding at quarter end. The facility is secured by substantially all related operating assets and is subject to a minimum fixed-charge coverage covenant.
- The ASW Loan was held by a company owned by the Company’s Vice Chairman, with another significant shareholder holding a 20% participation. A November 2012 amendment, effective December 1, 2012, extended the $16.214 million loan maturity to December 1, 2017, increased the interest rate to 8.5%, added collateral, and requires quarterly principal payments equal to 25% of prior-quarter net land-sale cash. At October 31, 2012, the loan bore interest at 5% and had a $529 thousand cash reserve.
- Management reported compliance with the covenants under both the Media Services credit facility and the ASW Loan at October 31, 2012.
Material Changes, Outlook, Risks, and Unusual Items
- Management attributed Media Services weakness to declining magazine circulation, competition from new media, customer losses, publisher title closures, and pricing pressure at contract renewals.
- Real estate results remain constrained by severe weakness in the Albuquerque-metro and Rio Rancho markets. Real estate inventory was $75.506 million, including approximately $71.213 million in the Rio Rancho market, with no land-sale revenue in the current periods.
- The Company contributed $3 million to its pension plan in August 2012. Approximately $8.7 million of accelerated pension funding remained included in contractual obligations. If the remaining obligation cannot be paid or adequately secured by August 15, 2013, the PBGC may require a letter of credit, cash escrow, installment payments with collateral, immediate payment, or could seek plan termination. Management provided no assurance that it can meet these requirements.
- Palm Coast had not met certain job retention, job creation, and capital investment requirements under a $3 million Florida incentive award. The State could require repayment of part or all of the award; the Company was negotiating with the State and could not predict the outcome.
- The Company settled IRS examinations of its 2005 and 2010 tax returns, paying $597 thousand of taxes and accruing $33 thousand of interest. The settlement resulted in a $41 thousand income-tax provision charge and a $589 thousand charge against previously accrued tax liabilities.
- A material Media Services customer contract expires in June 2014. Management stated that losing this contract would have a material adverse effect on the Company.
- Legal matters included the Anderson News litigation, where discovery had begun and defendants sought U.S. Supreme Court review; a Puerto Rico distribution lawsuit involving Kable, where a preliminary injunction remained stayed pending appeal; and the concluded Nest arbitration settlement.
- The filing provides no formal financial guidance. Management cautioned that interim results are not necessarily indicative of future results and identified financing needs, pension obligations, the Florida award, customer concentration, industry weakness, and real estate conditions as significant uncertainties.
Important Facts for Investors to Verify
- Whether Media Services can stabilize revenue and margins before the May 2014 credit-facility maturity and June 2014 customer-contract expiration.
- The status and funding terms of the remaining pension obligation before the August 15, 2013 PBGC deadline.
- Whether Palm Coast must repay some or all of the $3 million Florida award.
- The sustainability of the $15.077 million cash balance given negative operating cash flow and increased receivables.
- The effect of the related-party ASW Loan amendment, its 8.5% interest rate, collateral restrictions, and required land-sale cash sweeps.
- Potential outcomes and financial exposure from the Anderson News and Puerto Rico litigation.