AMREP Corporation Form 10-Q Summary
Reporting period: Fiscal first quarter ended July 31, 2014, compared with the three months ended July 31, 2013. AMREP operates Media Services businesses and a real estate business. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $17.928 million | $20.509 million |
| Loss before other income | $(1.232) million | $(1.089) million |
| Gain on settlement | $11.155 million | — |
| Net income (loss) | $6.264 million | $(0.687) million |
| Basic and diluted EPS | $0.82 | $(0.11) |
| Operating cash flow | $(4.141) million | $(6.844) million |
| Capital expenditures | $0.408 million | $0.054 million |
- Revenue declined 12.6%. Media Services revenue fell to $17.516 million from $20.278 million, primarily because Subscription Fulfillment Services and Newsstand Distribution Services declined.
- Net income benefited substantially from the $11.155 million non-cash gain on the Bauer settlement. The gain was partially offset by a $0.925 million non-cash impairment charge for discontinued software development.
- The reported net margin was approximately 35.0%, but was not representative of recurring operations because of the settlement gain. Loss before other income was approximately 6.9% of revenue.
- Media Services operating expenses declined to $14.537 million, or 83.0% of Media Services revenue, from $17.728 million, or 87.4%, in the prior-year quarter.
- Cash and cash equivalents were $9.879 million at July 31, 2014, down from $12.929 million at April 30, 2014. Total assets were $155.793 million and shareholders’ equity was $89.922 million.
- Total notes payable were $22.103 million, including $15.099 million owed under the related-party real estate loan. Total liabilities were $65.871 million.
- The Media Services revolving credit facility had a $15.000 million borrowing and letter-of-credit capacity, $2.629 million outstanding, and $11.074 million of availability at July 31, 2014. The facility matured May 12, 2015.
Material changes versus the prior comparable period
- The Bauer settlement generated a $11.155 million non-cash pre-tax gain and involved the issuance of 825,000 common shares valued at $4.274 million, representing approximately 10.3% of shares outstanding after issuance.
- The settlement transferred $22.626 million of Bauer-related receivables to Bauer and released $38.214 million of related accounts payable, materially reducing working-capital requirements.
- Receivables declined from $43.497 million at April 30, 2014 to $22.431 million at July 31, 2014; accounts payable and accrued expenses declined from $74.636 million to $33.308 million.
- Kable Distribution’s negative working capital and outstanding borrowings declined from approximately $27.863 million at April 30, 2014 to approximately $12.388 million at July 31, 2014. Negative working capital remained approximately $10.273 million at quarter-end.
- Media Services revenue decreased 13.6%, including a 14.6% decline in Subscription Fulfillment Services and a 32.1% decline in Newsstand Distribution Services.
- Real estate revenue increased to $0.384 million from $0.228 million, and the average gross profit percentage on land sales increased to 42% from 17%. Management cautioned that land-sale results vary substantially by transaction and timing.
- The Company recorded a $0.925 million impairment charge related to discontinued software development in Subscription Fulfillment Services.
Liquidity, debt, outlook, and risks
- Operating activities used $4.141 million of cash, while financing activities provided $1.499 million. Cash decreased by $3.050 million during the quarter.
- Contractual obligations totaled $26.615 million, including $22.103 million of notes payable, $1.767 million of operating leases, and $2.745 million of other obligations. The filing identifies $2.527 million of possible required repayment of state grant monies within “Other.”
- The related-party real estate loan bears interest at 8.5%, matures December 1, 2017, and is secured by real property with a book value of approximately $69.119 million. No principal is generally due until maturity, subject to required applications of certain real estate sale and royalty proceeds.
- The Company reported compliance with the covenants of both the Media Services Credit Facility and the AMREP Southwest loan at July 31, 2014.
- On September 8, 2014, AMREP Southwest entered into an oil and gas lease covering approximately 55,000 surface acres. It received approximately $1.010 million upfront, may receive a further $1.010 million extension payment, and is entitled to a 1/7 royalty on production. The lease does not require drilling, so future production and royalty revenue are uncertain.
- Management provided no specific earnings or revenue guidance. It cited continuing pressure on magazine publishers from new media, alternative distribution technologies, weak advertising, higher paper, printing and postal costs, and broader economic weakness.
- The filing states that interim results are not necessarily indicative of future results. Key risks include declining Media Services volumes, customer concentration and contract renewals, variable real estate sales, negative working capital at Kable Distribution, debt maturities, pension funding requirements, and potential obligations related to state grants.
Important facts for investors to verify
- Separate recurring operating performance from the $11.155 million non-cash Bauer settlement gain and the $0.925 million impairment charge.
- Review the terms, restrictions, and potential dilution associated with the 825,000 shares issued to Bauer.
- Monitor the Media Services Credit Facility maturity, borrowing availability, covenant compliance, and refinancing or repayment plans.
- Assess whether declining subscription and newsstand volumes are stabilizing and whether cost reductions can offset revenue pressure.
- Evaluate Kable Distribution’s continuing negative working capital and dependence on customer-related working-capital funding.
- Verify the financial impact and enforceability of the oil and gas lease, including the absence of a drilling obligation and the required allocation of royalties to the real estate lender.
- Review pension funding requirements, possible state grant repayment obligations, and other commitments not fully reflected in reported debt.