AMREP Corporation Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2015. The source filing is an annual report, not a quarterly report; references to “2014 Q4” appear to correspond to the fourth quarter of fiscal 2015.
Business Context
AMREP operated two continuing segments: Fulfillment Services, conducted primarily by Palm Coast Data and FulCircle Media, and Real Estate, conducted primarily by AMREP Southwest in Rio Rancho, New Mexico. During fiscal 2015, the Company sold its Newsstand Distribution, Product Packaging and Fulfillment, and Staffing Services businesses. These businesses are presented as discontinued operations.
Key Financial Metrics
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Continuing-operations revenue | $49.790 million | $62.197 million |
| Fulfillment Services revenue | $43.684 million | $58.479 million |
| Real estate land-sale revenue | $5.883 million | $3.634 million |
| Loss from continuing operations | $3.584 million, or $0.45 per share | $0.647 million, or $0.09 per share |
| Net income | $11.320 million, or $1.43 per share | Net loss of $2.939 million, or $0.42 per share |
| Net cash provided by continuing operating activities | $9.962 million | $5.495 million |
| Cash and cash equivalents | $12.050 million | $7.571 million |
| Total debt and notes payable | $18.090 million | $19.545 million |
| Shareholders’ equity | $93.321 million | $79.301 million |
Continuing-operations revenue declined approximately 20%, driven primarily by lower Fulfillment Services revenue, including a $5.841 million reduction from a significant customer that changed providers. Fulfillment Services operating expenses declined 21.1%, but costs represented 85.3% of segment revenue versus 80.8% in the prior year. Real estate land sales increased, although the average selling price declined to approximately $32,000 per acre from $41,000 because a greater proportion of undeveloped land was sold.
Continuing operations included $2.580 million of pretax, non-cash impairment charges, consisting primarily of $1.809 million related to real estate assets and $771,000 related to discontinued software development. Excluding impairment charges, the continuing-operations net loss was $1.959 million versus $0.215 million in fiscal 2014.
Reported fiscal 2015 net income was driven by discontinued operations, including $14.904 million of net income. Significant items included a $10.729 million pretax gain on business disposals, an $11.155 million pretax customer settlement gain, and a $1.500 million pretax reversal of a prior bad-debt reserve. Excluding these items, discontinued operations generated a pretax loss of approximately $1.247 million.
Material Changes Versus the Prior Period
- Fulfillment Services revenue fell from $58.479 million to $43.684 million, reflecting customer losses and continued pressure on magazine publishing.
- Real estate revenue increased from $3.634 million to $5.883 million, while acres sold increased from 89 to 186.
- Continuing-operations losses widened substantially, despite lower operating expenses, because of reduced revenue, higher impairment charges and pension-related costs.
- Cash increased by $4.479 million, primarily from operating cash flow and proceeds associated with working-capital changes; financing activities used $4.356 million.
- The defined benefit pension plan became more underfunded, increasing from $7.349 million to $11.259 million, largely due to changes in discount rates and mortality assumptions.
- Shareholders’ equity increased partly because the Company issued 825,000 shares, valued at $4.274 million, in connection with a customer settlement.
Debt, Liquidity and Capital Resources
- AMREP Southwest had $14.003 million outstanding under an 8.5% related-party real estate loan maturing December 1, 2017. The loan is secured by Rio Rancho real estate and requires 25% of defined net real estate-sale proceeds to be applied to principal.
- A warehouse mortgage had $4.087 million outstanding at April 30, 2015, bears interest at 6.35%, and matures in February 2018 with an expected balloon payment of approximately $3.716 million.
- The PNC revolving credit facility had $2.447 million of availability and no borrowings at year-end. It was scheduled to expire on August 12, 2015, and management expected it to expire by its terms.
- The Company expects fiscal 2016 capital expenditures to be funded by operating cash flow and financing capacity; the filing does not provide a specific fiscal 2016 capital-expenditure forecast.
Outlook, Risks and Unusual Items
- Management identified continuing pressure in magazine publishing from digital media, lower advertising, higher paper, printing and postal costs, and weak subscription demand.
- The five largest Fulfillment Services customers represented 37% of segment revenue. Customers expected to change providers represented approximately 9% of consolidated fiscal 2015 revenue in fiscal 2016 and an additional 8% in fiscal 2017; expected replacement revenue was described as materially lower.
- Palm Coast may be required to repay up to $2.527 million of a Florida economic-development award because certain job and investment requirements were not met. The amount and timing were unresolved.
- The pension plan had $27.044 million of assets and $38.303 million of obligations. The remaining accelerated PBGC funding liability was $5.019 million and was secured by mortgages on real property.
- The Company’s real estate business is concentrated in Rio Rancho and remains exposed to housing demand, builder inventory, development costs, market prices and potential additional impairment charges.
- Management reported a material weakness in internal control over financial reporting related to complex non-routine transactions, including pension accounting and tax accounting associated with the discontinued-business disposal. Remediation had begun but was not complete.
- The Company retained obligations and litigation exposure related to the businesses sold, including the Anderson News antitrust litigation. Damages had not been quantified in the filing.
- An oil and gas lease covering approximately 55,000 surface acres produced approximately $1.010 million of upfront consideration; $152,000 was recognized in fiscal 2015 and $758,000 remained deferred at year-end. The lease did not require drilling.
Important Facts for Investors to Verify
- Whether the Fulfillment Services customer departures expected in fiscal 2016 and 2017 occur and whether replacement contracts offset the lost revenue.
- The status and repayment amount of the potential Florida award liability of up to $2.527 million.
- Compliance with the related-party real estate loan covenants, required cash reserve and 2017 maturity obligations.
- Progress in remediating the material weakness in internal controls and the effect of future accounting adjustments.
- The adequacy of pension funding, PBGC collateral requirements and any additional acceleration risk.
- Future real estate impairments, land-sale volumes and the availability of financing for development.
- Recoverability of the $1.600 million buyer promissory note and potential exposure under the $2.000 million line of credit extended to the divested businesses.
- The ultimate outcome and financial exposure, if any, from retained litigation and other contingent obligations.