AMREP Corporation — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2018, compared with fiscal 2017 ended April 30, 2017. The request metadata references “2017 Q4,” but the filing is an annual report for fiscal 2018. AMREP operates through two primary segments: real estate, concentrated in Rio Rancho, New Mexico, and fulfillment services operated by Palm Coast Data.
Financial Performance and Position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $40.178 million | $42.368 million | Down 5.2% |
| Income before taxes | $3.456 million | $0.982 million | Up $2.474 million |
| Net income (loss) | $0.238 million | $(0.015) million | Improved $0.253 million |
| Basic EPS | $0.03 | $(0.00) | Improved |
| Net margin | 0.6% | Less than 0% | Improved |
| Operating cash flow | $0.531 million | $10.437 million | Down $9.906 million |
| Capital expenditures | $0.139 million | $0.249 million | Down $0.110 million |
| Cash and equivalents | $14.041 million | $11.811 million | Up $2.230 million |
| Notes payable, net | $1.843 million | None | New debt |
| Total assets | $105.865 million | $106.676 million | Down $0.811 million |
| Shareholders’ equity | $86.607 million | $84.833 million | Up $1.774 million |
Revenue mix: Fulfillment services revenue was $29.441 million, down from $31.030 million. Real estate land-sales revenue was $8.439 million, down from $9.381 million. Other revenue was $2.298 million, including a $1.810 million gain from a Florida settlement.
Segment results: Fulfillment services generated $0.851 million of net income and $6.141 million of EBITDA, compared with a $0.092 million net loss and $2.140 million of EBITDA in fiscal 2017. Real estate reported a $1.661 million net loss and $0.357 million of EBITDA, versus a $1.094 million net loss and $0.962 million of EBITDA in fiscal 2017. Corporate and other activities contributed $1.048 million of net income.
Balance sheet and liquidity: Real estate inventory increased to $58.874 million from $56.090 million, primarily from development activity and acquisitions in Rio Rancho. Receivables declined to $5.901 million from $6.379 million. Accounts payable and accrued expenses increased to $8.215 million from $7.035 million. The company reported no material long-term fixed-rate mortgage debt.
Material Changes Versus Prior Period
- Revenue declined 5.2%, primarily because of lower fulfillment-services volumes, customer losses and price concessions, together with lower real estate land sales.
- Net income improved to $238,000 from a $15,000 net loss. Excluding the $2.710 million non-cash tax expense related to the Tax Cuts and Jobs Act and the $150,000 real estate impairment charge recorded in fiscal 2017, adjusted net income was $2.948 million versus $80,000.
- Fulfillment operating and selling expenses decreased $2.612 million to $24.016 million, reflecting lower payroll, benefits, supplies and consulting costs.
- Real estate land sales declined, with 27 residential acres sold at an average of $237,000 per acre versus 36 acres at $248,000 per acre in fiscal 2017. New residential starts in Rio Rancho declined to 473 from 532.
- Interest expense fell to $57,000 from $333,000, primarily because prior real estate notes were paid in fiscal 2017.
- Operating cash flow fell sharply to $531,000 from $10.437 million, largely reflecting changes in real estate inventory, pension contributions, taxes and other liabilities.
- The frozen defined-benefit pension plan’s underfunded status improved to $9.051 million from $10.967 million, following a $1.040 million company contribution and favorable investment performance.
Guidance, Outlook, Risks and Unusual Items
- Management stated that available cash, bank financing and operating cash flows were expected to be adequate for anticipated fiscal 2019 capital expenditures and land-development spending, but additional development may require financing that may not be available on acceptable terms.
- The company expected customer transitions in fulfillment services to represent approximately 8% of consolidated fiscal 2018 revenue during fiscal 2019 and an additional approximately 5% during fiscal 2020. One customer representing approximately 10.8% of consolidated fiscal 2018 revenue had delayed, but not canceled, a significant transfer of business.
- The five largest fulfillment-services customers represented 41% of segment revenue, creating customer-concentration risk. The business also faces competition from new media, declining magazine subscriptions, price pressure, higher paper and postage costs, and potential data-security breaches.
- AMREP’s real estate assets are geographically concentrated in Rio Rancho. Results depend on land-sale timing, housing starts, market demand, development costs, entitlements and access to financing. Future impairment charges remain possible.
- A new development loan provided up to $4.750 million for Lomas Encantadas. Borrowings were $1.887 million at April 30, 2018 and $2.483 million as of July 2, 2018. The loan bears interest at 30-day LIBOR plus 3.0% and matures in December 2021.
- The Florida settlement eliminated a previously recorded $3.026 million liability and generated a $1.810 million pre-tax, non-cash gain. This was a material, nonrecurring contributor to fiscal 2018 results.
- The Tax Cuts and Jobs Act produced a provisional, non-cash income-tax expense increase of $2.710 million. The company had not completed its accounting for all tax effects as of April 30, 2018.
- The company’s pension arrangements remain a material contingency. The PBGC held first-lien mortgages on properties securing a remaining accelerated funding liability of $4.535 million at April 30, 2018. Noncompliance could permit the PBGC to repossess, sell or foreclose on mortgaged properties.
- Management disclosed ordinary-course litigation and approximately $873,000 of bonds supporting future Rio Rancho development commitments, but expected no material adverse effect from litigation.
- No cash dividends have been paid since fiscal 2008, and no future dividend is assured.
Investor Verification Checklist
- Verify the sustainability of reported earnings excluding the $1.810 million Florida settlement gain and the effect of the provisional tax adjustment.
- Review customer retention, renewals and actual revenue losses in the fulfillment-services segment, particularly the customer representing 10.8% of consolidated fiscal 2018 revenue.
- Assess Rio Rancho housing demand, residential starts, land-sale volumes, inventory carrying values and the potential for future impairment charges.
- Confirm availability and terms of the Lomas Encantadas development facility, borrowing growth and scheduled principal repayments.
- Monitor operating cash flow, real estate inventory investment and the company’s ability to fund development without materially increasing leverage.
- Evaluate pension funding requirements, PBGC covenant compliance, collateral values and any post-April 30, 2018 developments following the scheduled August 30, 2018 settlement termination date.
- Consider the company’s high customer concentration, thinly traded stock, concentrated shareholder ownership and absence of a regular dividend.
- Confirm the final accounting impact of the Tax Cuts and Jobs Act and subsequent adoption of applicable accounting standards.