AMREP Corporation — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the fiscal quarter and nine months ended January 31, 2014. AMREP operates Media Services businesses, including subscription fulfillment, newsstand distribution, product packaging and fulfillment, and a New Mexico real estate business. The filing refers to this period as the third quarter and first nine months of fiscal 2014, despite the request metadata identifying 2013 Q3.
Financial performance and position
Amounts are in thousands, except per-share data.
| Metric | Three months ended Jan. 31, 2014 | Three months ended Jan. 31, 2013 | Nine months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2013 |
|---|---|---|---|---|
| Revenue | $23,812 | $21,752 | $67,084 | $62,665 |
| Net income (loss) | $(11) | $3 | $(646) | $(329) |
| Basic and diluted earnings (loss) per share | $0.00 | $0.00 | $(0.09) | $(0.05) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $616 | $(13,114) |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $368 | $745 |
- Media Services revenue increased to $22,307 for the quarter and $64,140 for nine months, primarily because FulCircle contributed $1,852 and $5,073, respectively.
- Real estate land-sale revenue increased to $1,443 for the quarter and $2,867 for nine months, compared with $525 for each prior-year period. Land-sale gross margins declined to 3.0% for the quarter and 9.7% for nine months, versus 27.7% in both comparable 2013 periods.
- Media Services operating expenses were 84.5% of Media Services revenue for the quarter and 84.8% for nine months, compared with 82.8% and 82.1% in the prior-year periods.
- Consolidated EBITDA was $1,145 for the quarter and $2,957 for nine months, compared with $1,099 and $3,366, respectively. EBITDA is a company-defined non-GAAP segment performance measure.
- Cash and cash equivalents were $24,853 at January 31, 2014, compared with $13,714 at April 30, 2013. Total assets were $191,626, and shareholders’ equity was $79,161.
- Total notes payable were $24,503, including $4,724 drawn under the Media Services credit facility, $15,311 owed under the real estate loan, and $4,468 of other notes payable.
- Accounts payable and accrued expenses were $73,602, including $61,415 of publisher payables. Kable Distribution had approximately $24,777 of negative working capital.
Material changes versus the prior comparable periods
- Quarterly revenue increased 9.5%, while nine-month revenue increased 7.1%. Excluding FulCircle, other Media Services revenue declined by $159 for the quarter and $2,401 for nine months.
- Subscription Fulfillment Services revenue, excluding FulCircle, declined to $13,991 for the quarter and $39,777 for nine months. Newsstand Distribution Services revenue declined to $1,638 and $5,494, respectively.
- Product Packaging and Fulfillment Services and Other revenue increased to $4,826 for the quarter and $13,797 for nine months.
- The company moved from nominal quarterly net income to a $11 loss and increased its nine-month loss from $329 to $646. Higher interest expense, increased Media Services operating costs, and weaker land-sale margins contributed to the deterioration.
- Interest expense rose to $455 for the quarter and $1,382 for nine months, compared with $397 and $1,038, primarily due to the higher real estate loan rate and increased average Media Services borrowings.
- Operating cash flow improved to $616 from a use of $13,114, largely because of favorable changes in receivables and real estate assets, partially offset by reductions in accounts payable and pension costs.
- In July 2013, AMREP issued 1,199,242 treasury shares in a rights offering and received $7,144 of net proceeds. The proceeds supported working capital and a $3,243 contribution to the pension plan.
Outlook, risks, contingencies and unusual items
- No formal numerical earnings or revenue guidance is provided. Management cautions that interim results are not necessarily indicative of future results.
- Kable Distribution expects to lose a significant customer contract upon expiration in June 2014. Approximately $39,465 of accounts payable was owed to that customer at January 31, 2014, while Kable lacked sufficient capital or borrowing capacity to pay the amount without additional financing, asset sales or equity funding.
- A second Newsstand Distribution Services contract scheduled to expire in June 2014 represented approximately 14.2% of that segment’s nine-month revenue, or 1.2% of consolidated revenue. Renewal negotiations were continuing.
- Two Subscription Fulfillment Services contracts will not continue as previously scheduled: one represented 13.9% of segment revenue and 8.2% of consolidated revenue, and another represented 5.4% and 3.2%, respectively. The company recorded $372 of revenue in the quarter from minimum payments associated with the early termination of the first contract.
- Island Periodicals Puerto Rico discontinued operations, resulting in a $700 charge for estimated uncollectible receivables. A prior $2,000 Mercury reserve was reduced by $300 in the quarter and $600 for nine months due to collections and revised return estimates.
- The State of Florida has demanded approximately $1,305 of incentive repayments, and an additional $1,222 of 2013 and 2014 award monies and accrued interest is expected to be subject to repayment. The contractual obligations table includes $2,527 for possible grant repayment.
- The PBGC settlement left an accelerated pension funding liability of $5,019. The company pledged real property with an aggregate appraised value of $10,039 and must satisfy minimum funding, appraisal and other covenant requirements. Noncompliance could permit the PBGC to foreclose on mortgaged properties.
- The Media Services credit facility has a $15,000 borrowing limit and matures May 12, 2015. Availability was $14,654 at January 31, 2014, but $3,000 of availability was tied to the customer contract expiring in June 2014. The facility is subject to financial covenants and is secured by substantially all Media Services assets other than real property.
- The real estate loan matures December 1, 2017, bears interest at 8.5%, prohibits additional borrowings, and requires 25% of defined net real estate sale proceeds to be applied to principal.
- The IRS examination of fiscal 2011 and 2012 returns was settled without additional cash taxes because of net operating losses. Those losses were reduced by approximately $2,400, and the company reduced its uncertain-tax-position liability by $160.
- The company settled or resolved disclosed litigation matters involving Etagz and Distribution Integrated Services; the filing does not identify a material payment obligation for AMREP in those settlements.
Most important facts for investors to verify
- Whether the June 2014 customer contract expirations cause a material liquidity shortfall, particularly Kable’s ability to pay the approximately $39,465 owed to the departing customer.
- Whether the Media Services credit facility remains available after the June 2014 contract expiration and whether all financial covenants are satisfied.
- The renewal, replacement or financial impact of the significant Subscription Fulfillment and Newsstand Distribution contracts.
- The timing and final amount of potential Florida incentive repayments and any additional pension funding requirements.
- Whether Media Services revenue and margins can offset continued weakness in magazine publishing, customer losses and higher operating costs.
- The company’s ability to convert positive operating cash flow into sustainable earnings, given the nine-month net loss and reliance on working-capital movements.