AMREP Corp. 10-Q Summary: Period Ended October 31, 2007
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for AMREP Corporation for the three and six months ended October 31, 2007. The Company operates in three primary segments: Real Estate (AMREP Southwest), Fulfillment Services, and Newsstand Distribution Services (collectively Media Services). The Company is an accelerated filer incorporated in Oklahoma.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2007 | Six Months Ended Oct 31, 2007 | Six Months Ended Oct 31, 2006 |
|---|---|---|---|
| Total Revenues | $42.09 million | $93.45 million | $114.32 million |
| Net Income | $3.47 million | $9.73 million | $31.87 million |
| Earnings Per Share (Diluted) | $0.55 | $1.50 | $4.79 |
| Cash and Cash Equivalents | $22.40 million (Oct 31, 2007) | $22.40 million (Oct 31, 2007) | $42.10 million (Apr 30, 2007) |
| Total Debt (Notes Payable) | $43.77 million | $43.77 million | $32.30 million (Apr 30, 2007) |
| Operating Cash Flow (6mo) | $0.33 million | $0.33 million | $72.15 million |
| EBITDA (6mo) | $21.50 million | $21.50 million | $53.69 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 25% year-over-year for the quarter and 18% for the six-month period. This was driven primarily by a sharp decline in Real Estate land sales ($3.16M vs $31.71M in the prior quarter) due to a softening market in Rio Rancho, New Mexico, and reduced homebuilding permits.
- Media Services Growth: Media Services revenues increased significantly (55% for the quarter, 55% for six months) due to the January 2007 acquisition of Palm Coast Data Holdco, Inc. Fulfillment Services revenues rose, while Newsstand Distribution revenues declined slightly due to lower commission rates.
- Profitability Drop: Net income fell 78% for the quarter and 69% for the six-month period compared to the prior year. The Real Estate segment's gross profit margin on land sales decreased from 75% to 50% (quarter) and 70% to 66% (six months) due to a shift in sales mix toward developed lots with lower margins.
- Cash Flow Contraction: Net cash provided by operating activities dropped from $72.15 million in the prior six-month period to $0.33 million, largely due to the timing of real estate sales and increased inventory capitalization.
- Debt Increase: Total notes payable increased from $32.30 million to $43.77 million, primarily due to additional borrowings under the AMREP Southwest revolving line of credit.
Guidance, Outlook, Risks, and Unusual Items
- Cost Reduction Initiatives: Management announced a consolidation of Kable and Palm Coast fulfillment operations. A workforce reduction of approximately 75 people is expected to save $2.7 million annually. Additionally, the closure of the Marion, Ohio facility is projected to save $2.0 million annually, with $700,000 in severance costs to be incurred over the next 11 months.
- Stock Repurchases: The Company completed a 500,000-share repurchase program in October 2007 and authorized a new program for an additional 500,000 shares. As of October 31, 2007, 116,400 shares of the new program had been purchased.
- Subsequent Event (Fire): On December 5, 2007, a leased warehouse in Oregon, Illinois, was destroyed by fire. The Company is currently evaluating insurance coverage and the operational impact; no financial impact can be determined at this time.
- Discontinued Operations: A loss of $57,000 was recorded for the six-month period related to the settlement of litigation concerning a former water utility subsidiary in El Dorado, New Mexico.
- Market Risk: Approximately $40.05 million of debt is subject to variable interest rates, exposing the Company to interest rate fluctuations.
Investor Verification Checklist
- Real Estate Market Exposure: Verify the current status of the Rio Rancho, New Mexico housing market and the Company's ability to sell remaining inventory given the 50% drop in local building permits.
- Fire Impact Assessment: Monitor subsequent filings for the financial impact of the December 2007 warehouse fire and the adequacy of insurance proceeds.
- Debt Covenants: Review the terms of the extended revolving credit facility (maturity extended to September 2009) to ensure compliance with covenants given the reduced operating cash flow.
- Integration Synergies: Track the realization of the projected $4.7 million in annual cost savings from the consolidation of fulfillment operations and facility closures.
- Inventory Valuation: Assess the valuation of the $60.5 million real estate inventory, particularly in light of the declining gross margins on land sales.