AMREP Corp. 10-Q Summary: Quarter Ended January 31, 2009
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for AMREP Corporation for the three and nine-month periods ended January 31, 2009. The Company operates in four primary segments: Real Estate (AMREP Southwest), Subscription Fulfillment Services, Newsstand Distribution Services, and Product Fulfillment Services. The reporting period coincides with significant disruptions in the magazine distribution industry and a severe downturn in the real estate market.
Key Financial Metrics
| Metric | Three Months Ended Jan 31, 2009 | Nine Months Ended Jan 31, 2009 | Units |
|---|---|---|---|
| Total Revenues | $35,720 | $111,580 | Thousands |
| Net Income (Loss) | $(100) | $2,866 | Thousands |
| Earnings Per Share (Basic/Diluted) | $(0.02) | $0.48 | Per Share |
| Cash and Cash Equivalents | $18,347 | $18,347 | Thousands (Ending Balance) |
| Net Cash Used in Operating Activities | N/A | $(17,492) | Thousands |
| Total Debt (Notes Payable) | $42,395 | $42,395 | Thousands (Ending Balance) |
| Real Estate Inventory | $81,817 | $81,817 | Thousands (Ending Balance) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 18% year-over-year for the quarter ($35.7M vs. $43.4M) and 18% for the nine-month period ($111.6M vs. $136.9M).
- Real Estate: Land sales revenues plummeted 92% in the quarter ($0.5M vs. $6.3M) due to the absence of a large commercial lot sale in the prior year and a severe market decline in Rio Rancho, NM.
- Media Services: Revenues were relatively flat for the nine months but declined 4% in the quarter, driven by an 11% drop in Subscription Fulfillment Services due to lost business.
- Profitability: The Company reported a net loss of $100,000 for the quarter, compared to net income of $3.4 million in the same period last year. For the nine months, net income dropped to $2.9 million from $13.2 million.
- Cash Flow: Operating cash flow turned negative, using $17.5 million for the nine months, compared to providing $15.1 million in the prior year. This was driven by a decrease in accounts payable and an increase in receivables.
- Debt: Total notes payable increased to $42.4 million from $26.0 million at the end of the prior fiscal year, reflecting increased borrowings and the assumption of a mortgage for a warehouse acquisition.
Outlook, Risks, and Unusual Items
- Anderson News, LLC (ANCO) Receivable Risk: A major customer, ANCO, suspended operations and is in liquidation. AMREP holds approximately $7.5 million in net receivables from ANCO. The Company has not yet established an allowance for uncollectibility but acknowledges a significant portion may be uncollectible.
- Covenant Default Risk: If a significant reserve is established, Kable Media Services may default on its credit facility covenants. The Company is in discussions with lenders regarding potential waivers.
- Industry Disruption: Disruptions in the magazine distribution system (involving ANCO and Source Interlink Distribution) have adversely affected commission revenues in the Newsstand Distribution Services segment. The full financial impact is currently unquantifiable.
- Legal Proceedings:
- Antitrust Lawsuits: Source Interlink Distribution and ANCO have filed lawsuits alleging a conspiracy to boycott them. The Company intends to defend vigorously.
- Fire Recovery: Ongoing litigation related to a 2007 warehouse fire in Oregon, IL. The Company believes insurance proceeds and defenses will mitigate material impact, though claims remain pending.
- Restructuring: The Company is executing a unification project for its fulfillment services in Palm Coast, FL, with estimated capital expenditures of $15M-$20M and non-recurring cash costs of $6M. Incentives of up to $8M are anticipated from local/state governments.
- Real Estate Market: Continued decline in building permits and land sales in the Rio Rancho market due to national credit tightening and housing market issues.
Investor Verification Checklist
- ANCO Receivable Collectibility: Verify the status of the $7.5 million receivable from Anderson News, LLC and the likelihood of a write-down in the next quarter.
- Debt Covenant Compliance: Confirm whether the Company has secured a waiver from its lenders regarding potential covenant defaults triggered by the ANCO receivable reserve.
- Real Estate Inventory Valuation: Assess the marketability and valuation of the $81.8 million real estate inventory given the severe downturn in the Rio Rancho market.
- Legal Exposure: Monitor the progress of the antitrust lawsuits filed by Source Interlink and ANCO, and the outcome of the warehouse fire litigation.
- Refinancing Terms: Evaluate the terms of the upcoming renewal of the $25 million AMREP Southwest credit facility maturing in September 2009, given the lender's indication of stricter terms.