AMREP Corp. 10-Q Summary: Quarter Ended October 31, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for AMREP Corporation for the three and six-month periods ended October 31, 2008 (Fiscal 2009). The Company operates in three primary segments: Real Estate (AMREP Southwest), Fulfillment Services, and Newsstand Distribution Services (collectively Kable Media Services). The Company is an accelerated filer with 5,996,212 shares of common stock outstanding as of November 30, 2008.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2008 | Six Months Ended Oct 31, 2008 |
|---|---|---|
| Revenues | $40.29 million | $75.86 million |
| Net Income | $2.90 million ($0.48 EPS) | $2.97 million ($0.49 EPS) |
| Operating Cash Flow | N/A | $(7.80) million (Used) |
| Cash and Equivalents | $29.86 million | $29.86 million |
| Total Debt (Notes Payable) | $37.52 million | $37.52 million |
| EBITDA (Six Months) | N/A | $9.94 million |
Segment Performance (Six Months 2008): Real Estate generated $6.07 million in revenue with a loss of $1.15 million before taxes. Fulfillment Services generated $62.83 million in revenue with $993,000 income before taxes. Newsstand Distribution generated $6.53 million in revenue with $4.05 million income before taxes.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 4.3% in the quarter and 18.8% year-to-date compared to the prior year. The decline is primarily driven by the Real Estate segment, where land sales dropped from $21.31 million (six months 2007) to $6.07 million (six months 2008) due to a severe downturn in the Rio Rancho, New Mexico market.
- Profitability Drop: Net income for the six months ended October 31, 2008, was $2.97 million, a significant decrease from $9.73 million in the same period of 2007. This reflects lower real estate sales and a lack of one-time gains present in the prior year (e.g., a $1.87 million gain on commercial property sale in 2007).
- Cash Flow Deterioration: Operating cash flow turned negative, using $7.80 million in the first six months of 2009, compared to providing $0.33 million in the prior year. This was driven by a decrease in accounts payable and an increase in real estate inventory.
- Debt Increase: Total notes payable increased to $37.52 million from $25.98 million at the end of the prior fiscal year, reflecting increased borrowings by both Real Estate and Media Services operations.
Outlook, Risks, and Unusual Items
- Restructuring Initiative: The Company announced a project to unify Fulfillment Services under the "Palm Coast Data" brand in Florida. This is expected to cost $15-$20 million in capital expenditures and $6 million in non-recurring cash costs over two to three years. The Company anticipates receiving up to $8 million in government incentives.
- Real Estate Market Risk: Management cites a severe decline in the Albuquerque/Rio Rancho real estate market, with a 28% drop in single-family building permits. Builders are delaying purchases of developed lots, and sales of undeveloped land have steeply declined.
- Financing Risks: Due to volatile credit markets, the Company's $25 million revolving credit facility (maturing September 2009) may face renewal on less favorable terms, including higher interest rates. There is no assurance financing will be available for the Palm Coast expansion.
- Legal Contingencies:
- Warehouse Fire: A December 2007 fire destroyed a leased warehouse. While the Company received insurance advances, it faces lawsuits from the warehouse owner and magazine publishers seeking damages exceeding $1 million. The Company intends to defend vigorously but cannot predict the outcome.
- Pension Funding: Market declines reduced the pension plan asset value from $27.2 million to approximately $17.9 million, likely triggering additional funding requirements in calendar 2009.
- Subsequent Acquisitions: In November 2008, the Company acquired assets of Service Parts Supply Corp. and Resource One Staffing for approximately $7.5 million to expand fulfillment capabilities.
Investor Verification Checklist
- Verify the status and terms of the renewal for the $25 million AMREP Southwest credit facility maturing in September 2009.
- Monitor the progress and cost overruns of the Palm Coast Data unification project and the realization of the $8 million in government incentives.
- Assess the potential financial impact of the pending lawsuits related to the Oregon, Illinois warehouse fire, specifically regarding the denial of coverage for "willful and wanton misconduct" claims.
- Review the trajectory of the Rio Rancho real estate market and the Company's ability to sell developed inventory given the 28% decline in building permits.
- Confirm the specific funding requirements for the Company's pension plan following the significant drop in asset fair value.