AMREP Corporation — Fiscal 2018 First-Quarter 10-Q Summary
Business Context and Reporting Period
AMREP Corporation operates through two primary segments: real estate, conducted by AMREP Southwest, and fulfillment services, conducted by Palm Coast Data. This Form 10-Q covers the three months ended July 31, 2017, referred to in the filing as the first quarter of fiscal 2018. Comparative results are for the three months ended July 31, 2016. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $11.326 million | $12.208 million | Down $0.882 million |
| Income before taxes | $2.214 million | $0.967 million | Up $1.247 million |
| Net income | $1.448 million | $0.630 million | Up $0.818 million |
| Basic diluted EPS | $0.18 | $0.08 | Up $0.10 |
| Net cash provided by operations | $1.315 million | $3.228 million | Down $1.913 million |
| EBITDA | $2.548 million | $1.558 million | Up $0.990 million |
Net income margin was approximately 12.8% versus 5.2% in the prior-year quarter. The improvement primarily reflected lower real estate land-sale costs, lower fulfillment operating expenses, reduced interest expense and the $1.318 million Florida settlement gain.
- Fulfillment services revenue was $7.243 million, down from $7.828 million. Segment operating income improved to $1.040 million from a $42,000 loss, primarily because costs declined with lower business volumes.
- Real estate revenue was $2.747 million, including $2.677 million of land-sale revenue, compared with $4.370 million in the prior-year quarter. Real estate segment operating income was $180,000 versus $247,000.
- Other revenue was $1.406 million, compared with $1.660 million. Current-period other revenue included a $1.318 million pre-tax gain from the Florida settlement; prior-year other revenue included a $1.496 million gain on the sale of a retail commercial building.
- Cash and cash equivalents were $13.116 million at July 31, 2017, up from $11.811 million at April 30, 2017.
- Total assets were $105.808 million and shareholders’ equity was $86.358 million at July 31, 2017.
- Real estate inventory was $55.358 million, down from $56.090 million at April 30, 2017.
- Total liabilities were $19.450 million, down from $21.843 million. No debt balance was separately reported on the consolidated balance sheet; the filing states that two AMREP Southwest notes payable were paid in full during fiscal 2017.
- Capital expenditures were $10,000, all for the fulfillment services business.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue declined approximately 7%, primarily because fulfillment volumes fell and the prior-year period benefited from a commercial-property sale.
- Net income more than doubled, despite lower revenue, because land-sale costs declined substantially, fulfillment costs were reduced, interest expense fell from $224,000 to $13,000, and the current period included the Florida settlement gain.
- Real estate land-sale gross profit improved. New Mexico land-sale gross profit percentage increased to 18% from 5%, reflecting a more favorable mix and pricing of developed lots. Current-period land sales also included $2.044 million from an approximately five-acre undeveloped commercial property in Colorado, with a reported gross profit percentage of 65%.
- Operating cash flow declined because the prior-year period benefited from larger favorable changes in real estate inventory and investment assets. The current period also included a $1.318 million non-cash settlement gain adjustment.
- Debt-related cash payments were $6.796 million in the prior-year quarter, including $5.901 million of related-party principal payments; there were no debt proceeds or principal payments in the current quarter.
Outlook, Risks, Contingencies, and Unusual Items
- A fulfillment-services customer representing approximately 10% of total company revenue in the current quarter notified Palm Coast that a significant portion of its business will be transferred during 2018. Management identifies the expected customer loss and its effect as a material forward-looking risk.
- The fulfillment business faces industry pressure from new media, alternative content-distribution technologies, weaker advertising, higher paper and printing costs, increased postal rates, reduced subscription sales and publisher contract repricing.
- The Florida settlement reduced a previously recorded $3.026 million liability, including accrued interest, to $1.406 million. Palm Coast paid $163,000 during the quarter, leaving a remaining liability of $1.243 million. A $302,000 deferred gain was recorded, of which $20,000 was recognized during the quarter; the remaining $282,000 is expected to be recognized over approximately eight years.
- The company had $4.535 million of pension-related obligations secured by first-lien mortgages on real property. No additional pension payment was required during the quarter based on updated property appraisals.
- The company does not provide specific quantitative earnings or revenue guidance in the filing. Management states that land-sale results can vary significantly by transaction timing, property type and location.
- AMREP does not expect to early adopt the new revenue-recognition standard, Topic 606, and had not estimated its quantitative impact. The company also had not concluded how the new lease standard would affect its financial statements.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the timing and magnitude of the announced fulfillment-services customer transition and its effect on Palm Coast revenue, margins and cash flow.
- Separate recurring operating performance from the $1.318 million Florida settlement gain and compare it with the nonrecurring $1.496 million property-sale gain in the prior-year period.
- Monitor real estate inventory, land-sale volume, gross profit percentages and the availability of future developable properties.
- Confirm the remaining $1.243 million Florida settlement liability and the schedule for recognizing the $282,000 deferred gain.
- Assess pension funding requirements, collateral values and the potential impact of future property appraisals.
- Track the company’s implementation of Topic 606 and the future lease-accounting standard, as quantitative effects were not yet determined.