AMREP Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2011, filed December 9, 2011. Comparisons are with the periods ended October 31, 2010. AMREP operates Media Services businesses—subscription fulfillment, newsstand distribution, and product services—and a real estate business in New Mexico and Colorado. The interim financial statements are unaudited.
Financial Performance and Position
| Metric | Three months ended October 31, 2011 | Three months ended October 31, 2010 | Six months ended October 31, 2011 | Six months ended October 31, 2010 |
|---|---|---|---|---|
| Revenue | $23.351 million | $25.816 million | $44.844 million | $50.903 million |
| Income before taxes | $1.866 million | $1.214 million | $1.439 million | $0.467 million |
| Net income | $1.083 million | $0.731 million | $0.804 million | $0.233 million |
| Basic and diluted EPS | $0.18 | $0.12 | $0.13 | $0.04 |
| Net margin | 4.6% | 2.8% | 1.8% | 0.5% |
| Consolidated EBITDA | $3.560 million | $3.236 million | $4.859 million | $4.456 million |
Media Services revenue declined 12.9% in the quarter and 12.4% year to date, while real estate land-sale revenue increased to $1.327 million from $0.489 million in the quarter and to $1.435 million from $1.313 million year to date. The effective tax rate was 42.0% for the quarter and 44.0% year to date, compared with 40.0% and 50.0%, respectively, in the prior-year periods.
Cash flow and capital allocation: Operating cash flow was $7.630 million for the first six months, compared with $6.243 million in the prior year. Capital expenditures were $0.697 million, versus $0.298 million. Financing activities used $1.330 million, reflecting $7.704 million of debt proceeds and $9.034 million of principal repayments. Cash increased to $31.371 million from $25.756 million at April 30, 2011.
Balance sheet and liquidity: Total assets were $188.984 million and shareholders’ equity was $79.750 million at October 31, 2011. Real estate inventory was $75.551 million. Total notes payable were $22.655 million, including $18.235 million due within one year. Accounts payable and accrued expenses were $70.285 million. The Media Services revolving credit facility provides up to $20.0 million, subject to borrowing-base limitations, and had no outstanding borrowings at October 31, 2011; peak quarterly borrowings were $4.334 million. All financing facilities were reported to be in compliance with their covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased 9.6%, while six-month revenue decreased 11.9%, primarily because of lower Media Services activity.
- Subscription Fulfillment Services revenue decreased 15.6% in the quarter and 13.6% year to date because of customer losses, lower publisher volumes, and magazine-title attrition.
- Newsstand Distribution Services revenue decreased 11.6% in the quarter and 18.4% year to date because of lower retail magazine sales and distribution volumes.
- Product Services and Other revenue increased modestly, primarily because of higher temporary staffing revenue.
- Media Services operating expenses declined, aided by payroll and benefit reductions and efficiencies from the completed consolidation of subscription fulfillment operations into Palm Coast, Florida.
- Real estate gross profit percentages increased to 83% for the quarter and 79% year to date, versus 16% and 38%, respectively, because the 2011 sales mix included higher-margin commercial and undeveloped residential land.
- Net income increased despite lower revenue, supported by cost reductions, higher-margin land sales, lower interest expense, and lower other operating expenses.
- Receivables from Media Services decreased to $23.956 million from $28.125 million at April 30, 2011, primarily due to collection timing.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management provided no specific numerical earnings or revenue guidance. It cautioned that interim results are not necessarily indicative of future periods.
- Media Services remains exposed to recessionary effects, declining magazine subscriptions and newsstand sales, publisher closures of titles, customer losses, and competition from digital media.
- The real estate market in the Albuquerque/Rio Rancho area remained severely depressed relative to periods before fiscal 2009. Land-sale revenue, gross profit, and margins may vary significantly with the timing and mix of transactions.
- The ASW Credit Facility had an $18.089 million balance, requires scheduled principal payments beginning December 15, 2011, and matures September 1, 2012. AMREP Southwest expected to seek renewal, but the filing states that renewal on acceptable terms is not assured. Failure to renew could require replacement financing, asset sales, or equity financing.
- The Company’s defined benefit pension plan experienced a partial termination following employee separations. The PBGC estimated termination-basis unfunded liability at approximately $16 million and indicated that approximately $12 million could be required to be contributed, escrowed, or supported by a bond. AMREP was negotiating an alternative arrangement, with no assurance of success.
- The Florida incentive award of $3 million remains recorded as a long-term liability until job-retention, job-creation, and capital-investment conditions through December 31, 2012 are satisfied. A portion or all of the award could be repayable.
- Unrecognized tax benefits were $0.333 million. The Company expects to use federal net operating loss carryforwards to offset current-year taxable income.
- Contractual obligations totaled $30.893 million, including $22.655 million of notes payable and $8.238 million of operating leases and other obligations. Obligations due within one year totaled $21.034 million.
- In litigation, most claims against the Kable defendants in Haan v. Kable News Company were dismissed, subject to possible repleading and remaining contribution-related claims. The separate Alpinist v. Haan matter was settled and dismissed, with the Company’s allocated settlement paid by its insurer.
Important Facts for Investors to Verify
- Whether AMREP Southwest renewed or replaced the $18.089 million ASW Credit Facility before its September 1, 2012 maturity.
- The eventual resolution and cash impact of the potential approximately $12 million PBGC accelerated pension-funding requirement.
- Whether the Company satisfied the Florida incentive award conditions and retained the $3 million award.
- Trends in subscription fulfillment customer retention, magazine-title volumes, and newsstand distribution activity.
- The recoverability and valuation of the $75.551 million real estate inventory in the weak Rio Rancho market.
- Compliance with debt covenants and the availability of the Media Services revolving facility as receivables and collections change.
- The timing and margin mix of future land sales, since reported real estate profitability varies materially by transaction type.