AMREP CORP. quarterly report, Q2 FY2016

AMREP Corporation Form 10-Q Summary

Business Context and Reporting Period

AMREP Corporation operates primarily through two continuing segments: Fulfillment Services, conducted by Palm Coast Data LLC, and real estate, conducted by AMREP Southwest Inc. The filing covers the three and six months ended October 31, 2015, the second quarter and first six months of fiscal 2016. Prior-period results were reclassified for discontinued operations following the 2015 sales of the Newsstand Distribution Services, Product Packaging and Fulfillment Services, and Staffing Services businesses.

Financial Results and Key Metrics

Metric	Three Months Ended October 31, 2015	Three Months Ended October 31, 2014	Six Months Ended October 31, 2015	Six Months Ended October 31, 2014
Revenue from continuing operations	$11.221 million	$14.357 million	$20.796 million	$26.678 million
Loss from continuing operations	$0.676 million	$0.097 million	$1.855 million	$0.733 million
Loss per share from continuing operations	$0.08	$0.01	$0.23	$0.10
Net income (loss)	$(0.676) million	$0.254 million	$(1.855) million	$6.518 million
Cash flow from continuing operating activities	Not separately provided	Not separately provided	$(1.894) million	$7.133 million

Second-quarter revenue declined approximately 22% year over year; six-month revenue declined approximately 22%.
Fulfillment Services revenue was $8.726 million in the quarter and $17.907 million for six months, versus $11.803 million and $23.712 million, respectively, in the prior-year periods.
Real estate land-sale revenue was $2.180 million in the quarter and $2.290 million for six months, compared with $2.513 million and $2.897 million, respectively.
Land-sale gross profit margins were 13.7% for the quarter and 16.2% for six months, compared with 12.9% and 16.8% in the prior-year periods.
Consolidated EBITDA, as defined by the Company, was negative $35,000 in the quarter and negative $814,000 for six months, compared with positive $1.095 million and $2.193 million, respectively.
Cash and cash equivalents were $12.397 million at October 31, 2015, compared with $12.050 million at April 30, 2015.
Total assets were $135.188 million and shareholders’ equity was $91.481 million at October 31, 2015.
Total notes payable were $17.208 million, including $13.183 million owed under the related-party real estate loan and $4.025 million of other notes payable.
Real estate inventory was $65.533 million, compared with $66.321 million at April 30, 2015.

Material Changes Versus the Prior Comparable Period

Fulfillment Services revenue fell primarily because a significant customer changed fulfillment providers. Prior-year revenue from that customer included contract termination fees with little or no related operating expense.
Fulfillment Services operating expenses decreased to $7.867 million in the quarter and $16.647 million for six months, principally due to lower payroll, benefits, facilities, equipment, and depreciation costs.
Fulfillment Services nevertheless shifted from positive segment EBITDA of $1.157 million in the prior-year quarter to $56,000, and from positive $2.515 million for the prior-year six months to negative $293,000.
Real estate operations remained loss-making, with segment EBITDA of negative $320,000 for the quarter and negative $846,000 for six months.
Real estate and corporate general and administrative expenses increased to $946,000 for the quarter and $1.965 million for six months, primarily due to higher pension costs assumed by the corporate office for former employees of discontinued businesses.
Interest expense declined modestly to $364,000 for the quarter and $743,000 for six months, primarily because of lower average real estate loan balances.
The prior-year six-month period included $7.251 million of income from discontinued operations, including a $11.155 million pretax settlement gain. No discontinued-operations income was recorded in the current periods.
The prior-year six-month period also included a $925,000 impairment charge related to discontinued software development; no comparable charge was recorded in the current period.

Cash Flow, Debt and Liquidity

Operating activities used $1.894 million during the first six months, compared with $7.133 million provided in the prior-year period. The current-period use included $2.444 million of cash absorbed by taxes receivable and payable.
Investing activities used $271,000, all for capital expenditures in Fulfillment Services.
Financing activities provided $2.512 million, including $2.000 million of proceeds from a line-of-credit receivable, partially offset by $882,000 of principal debt payments and including $1.394 million of net transfers from discontinued operations.
The PNC revolving credit facility expired on August 12, 2015; there were no borrowings under it before expiration.
The $13.183 million related-party real estate loan bears interest at 8.5%, matures December 1, 2017, and is secured by AMREP Southwest real property with an October 31, 2015 book value of approximately $63.103 million. The Company reported compliance with its covenants.
The $4.025 million warehouse mortgage bears interest at 6.35% and matures in February 2018; $132,000 is due within one year.
In November 2015, a subsidiary entered into a construction loan permitting borrowings of up to $933,000, maturing October 31, 2016, for a retail building expected to be subject to a long-term lease.

Guidance, Outlook, Risks and Unusual Items

The filing provides no formal earnings or revenue guidance.
Management cited continuing pressure on magazine publishers from new media, alternative distribution technologies, weaker advertising, higher paper and printing costs, and higher postal rates. These conditions may reduce subscription sales and cause customers to close titles, change providers, or demand more favorable terms.
Continued adverse Fulfillment Services conditions could result in additional impairment charges for long-lived assets.
Real estate revenue and margins may vary substantially based on the timing, type, location, and size of individual land transactions.
No royalties were received under the oil and gas lease during the first six months. Approximately $644,000 of deferred lease revenue remained at October 31, 2015; $114,000 was recognized during the six-month period.
The Company maintains a defined-benefit pension plan with $11.768 million of accrued pension cost. Certain real property secures $5.019 million of pension-related obligations, and additional funding could be required if property appraisals fall below specified thresholds.
A previously identified material weakness involving complex and non-routine transactions remained unresolved. Management reported effective disclosure controls and no material change in internal control during the quarter, while remediation efforts continued.
The Company stated that its liability for unrecognized tax benefits was $58,000 and was not expected to change materially during the following twelve months.

Important Facts for Investors to Verify

Whether Fulfillment Services revenue and profitability stabilize after the loss or transition of the significant customer.
The timing and profitability of future New Mexico land sales, including the substantial real estate inventory balance.
Availability of replacement working-capital financing following expiration of the PNC facility.
Repayment capacity and refinancing risk for the $13.183 million related-party loan maturing in December 2017 and the $4.025 million warehouse mortgage maturing in February 2018.
Potential future impairment charges, pension funding requirements, and the status of remediation of the material weakness in internal control.
Construction progress, financing draws, and lease commencement for the new retail building.
The sustainability of liquidity given negative operating cash flow in the first six months and dependence on asset sales, receivable collections, and financing activities.