AMREP Corporation — Form 10-Q Summary
Business context and reporting period
AMREP operates Media Services businesses—Subscription Fulfillment, Newsstand Distribution, and Product Services and Other—and a real estate business operated by AMREP Southwest. This unaudited report covers the three and nine months ended January 31, 2012, the third quarter and first nine months of fiscal 2012, compared with the corresponding fiscal 2011 periods.
Financial performance and condition
| Metric | Q3 FY2012 | Q3 FY2011 | 9M FY2012 | 9M FY2011 |
|---|---|---|---|---|
| Revenue | $21.424 million | $23.846 million | $66.268 million | $74.749 million |
| Income before taxes | $(0.984) million | $0.694 million | $0.455 million | $1.161 million |
| Net income (loss) | $(0.316) million | $1.281 million | $0.488 million | $1.514 million |
| Basic and diluted EPS | $(0.05) | $0.21 | $0.08 | $0.25 |
| EBITDA | $0.629 million | $2.609 million | $5.488 million | $7.065 million |
Revenue declined 10.2% in the quarter and 11.4% for the nine-month period. Net margin was approximately negative 1.5% in Q3 and 0.7% for the first nine months, compared with approximately 5.4% and 2.0%, respectively, in the prior-year periods. The reported tax benefits were $0.668 million in Q3 and $0.033 million for the nine months, including $0.382 million from reductions in previously unrecognized tax benefits.
- Media Services revenue decreased to $21.419 million in Q3 and $64.815 million for nine months, from $23.570 million and $73.099 million, respectively. Subscription Fulfillment revenue fell to $15.589 million and $48.775 million, while Newsstand Distribution revenue fell to $2.213 million and $7.112 million.
- Product Services and Other revenue increased to $3.617 million in Q3 and $8.928 million for nine months, primarily due to temporary staffing revenue.
- Media Services operating expenses declined in absolute dollars but increased to 85.2% of related revenue in Q3 and 82.3% for nine months, versus 81.6% and 81.3% in the prior-year periods.
- Real estate revenue was zero in Q3 and $1.435 million for nine months, compared with $0.257 million and $1.570 million. The nine-month gross margin on land sales was 72%, versus 34% in the prior-year period, primarily because of the mix of land sold.
- Cash and cash equivalents were $26.881 million at January 31, 2012, compared with $25.756 million at April 30, 2011. Total assets were $181.504 million and shareholders’ equity was $79.434 million.
- Net cash provided by operating activities was $3.903 million for the first nine months, down from $8.168 million. Capital expenditures were $0.761 million, and financing activities used $2.029 million after $8.277 million of debt proceeds and $10.306 million of principal payments.
Debt, liquidity, and material changes
- Total notes payable were $21.956 million at January 31, 2012, compared with $23.985 million at April 30, 2011. Amounts due within one year increased to $17.570 million from $2.660 million, primarily reflecting the maturity profile of the real estate facility.
- The Media Services revolving facility has capacity of up to $20 million and matures May 12, 2013. Availability was $11.278 million at January 31, 2012, with no borrowings outstanding; peak quarterly borrowings were $0.442 million.
- The AMREP Southwest facility had $17.431 million outstanding, bears interest at 5.0%, requires a $0.532 million interest reserve, and has remaining principal payments due in March and June 2012, with the balance due September 1, 2012. The company cannot draw additional amounts under this facility.
- Management stated that both credit facilities were in compliance with their covenants at January 31, 2012. AMREP Southwest expects to discuss an extension of its facility, but no assurance was provided that an extension or replacement financing will be available on acceptable terms.
- Real estate inventory was $75.668 million, including $71.377 million in Rio Rancho, New Mexico. Investment assets were $11.590 million, including land held for long-term investment.
Outlook, risks, contingencies, and unusual items
- Management attributed the Media Services revenue decline to competition from new media, recession-related weakness, declining subscription and newsstand sales, magazine title closures, customer losses, and pressure for more favorable customer terms.
- The company completed consolidation of Subscription Fulfillment operations into Palm Coast, Florida. The consolidation reduced payroll, benefits, facilities, equipment, and restructuring costs, but Q3 general and administrative expense included severance associated with a management reorganization.
- Real estate markets in the Albuquerque and Rio Rancho areas remain severely depressed. Management cautioned that impairment testing depends on uncertain estimates of future sales prices, costs, holding periods, and market conditions; material future impairment charges are possible.
- More than 20% of active defined-benefit plan participants were separated in connection with the consolidation. The PBGC calculated an approximately $16 million termination-basis unfunded liability and indicated that approximately $11.7 million could be required through accelerated contributions, escrow, or a bond. AMREP was negotiating an alternative arrangement, with no assurance of a satisfactory outcome.
- The company recorded a $3 million Florida incentive award as a long-term liability because job retention, job creation, and capital investment objectives must be achieved through December 31, 2012. Failure to meet the objectives could require repayment of part or all of the award.
- Contractual obligations totaled $31.072 million, including $21.956 million of notes payable and $9.116 million of operating leases and other obligations. Obligations due within one year totaled $22.007 million, excluding any accelerated pension funding that the PBGC might require.
- The Haan v. Kable News Company litigation was settled and dismissed with prejudice; the company’s nominal settlement allocation was paid by its liability insurer.
Investor verification priorities
- Verify the company’s ability to refinance, extend, or repay the $17.431 million AMREP Southwest facility due September 1, 2012.
- Assess whether declining Subscription Fulfillment and Newsstand revenue reflects a continuing structural decline and whether cost reductions can offset lost volume.
- Review PBGC negotiations and any required accelerated pension funding, escrow, or bonding.
- Evaluate the carrying value and impairment risk of the $75.668 million real estate inventory in weak regional markets.
- Separate recurring operating results from the $0.382 million tax benefit related to previously unrecognized tax benefits and other tax carryforward effects.
- Confirm compliance with debt covenants, the availability of the Media Services credit facility, and the company’s ability to meet near-term contractual obligations.