AXR AMREP Corp

INTRODUCTION

AMREP Corporation (the “Company”), through its subsidiaries, is primarily engaged in two business segments: the real estate business operated by AMREP Southwest Inc. (“AMREP Southwest”) and its subsidiaries and the fulfillment services business operated by Palm Coast Data LLC (“Palm Coast”) and its affiliates. Information concerning industry segments is set forth in Note 8 of the notes to the consolidated financial statements included in this report on Form 10-Q. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company’s foreign sales and activities are not significant.

The following provides information that management believes is relevant to an assessment and understanding of the Company’s consolidated results of operations and financial condition. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q and with the Company’s annual report on Form 10-K for the year ended April 30, 2017, which was filed with the Securities and Exchange Commission on July 18, 2017 (the “2017 Form 10-K”). Many of the amounts and percentages presented in this Item 2 have been rounded for convenience of presentation. Unless otherwise qualified, all references to 2018 and 2017 are to the fiscal years ending April 30, 2018 and 2017 and all references to the second quarter and first six months of 2018 and 2017 mean the fiscal three month and six month periods ended October 31, 2017 and 2016.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based on the accounting policies used and disclosed in the 2017 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of the 2017 Form 10-K. The preparation of those consolidated financial statements required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts or results could differ from those estimates.

The critical accounting policies, assumptions and estimates are described in Item 7 of Part II of the 2017 Form 10-K. There have been no changes in these accounting policies.

The significant accounting policies of the Company are described in Note 1 to the consolidated financial statements contained in the 2017 Form 10-K. Information concerning the Company’s implementation and the impact of recent accounting standards issued by the Financial Accounting Standards Board is included in the notes to the consolidated financial statements contained in the 2017 Form 10-K and in the notes to the unaudited consolidated financial statements included in this quarterly report on Form 10-Q. The Company did not adopt any accounting policy in the first six months of 2018 that had a material impact on its consolidated financial statements.

RESULTS OF OPERATIONS

For the second quarter of 2018, the Company recorded net income of $278,000, or $0.03 per share, compared to net income of $112,000, or $0.01 per share, for the second quarter of 2017. For the first six months of 2018, the Company recorded net income of $1,726,000, or $0.21 per share, compared to net income of $742,000, or $0.09 per share, for the same period of 2017. Revenues were $9,175,000 and $20,501,000 for the second quarter and first six months of 2018 compared to $11,465,000 and $23,673,000 for the same periods of the prior year.

Revenues from land sales at AMREP Southwest and its subsidiaries were $1,416,000 and $4,093,000 for the second quarter and first six months of 2018 compared to $3,529,000 and $6,249,000 for the same periods of 2017. $2,044,000 of the $4,093,000 of revenues from land sales for the first six months of 2018 was for an approximate five acre undeveloped commercial property in Colorado, which was sold in the first quarter of 2018 and had a gross profit percentage of 65%.

For the second quarter and first six months of 2018 and 2017, the Company’s land sales in New Mexico were as follows (dollars in thousands):

The average gross profit percentage on New Mexico land sales was 20% and 19% for the second quarter and first six months of 2018 compared to 17% and 12% for the same periods of 2017. The increased profit percentage was attributable to the mix of lots sold with 2018 reflecting more favorable lot pricing relative to costs on developed lots compared to 2017. As a result of many factors, including the nature and timing of specific transactions and the type and location of land being sold, revenues, average selling prices and related average gross profits from land sales can vary significantly from period to period and prior results are not necessarily a good indication of what may occur in future periods.

Revenues from the Company’s fulfillment services operations decreased from $7,858,000 and $15,686,000 for the second quarter and first six months of 2017 to $7,673,000 and $14,916,000 for the same periods in 2018. The lower revenues were attributable to reduced business volumes from existing customers, certain price concessions on renewed contracts and lost business. Magazine publishers are one of the principal customers of the Company’s fulfillment services operations, and these customers have continued to be negatively impacted by increased competition from new media sources, alternative technologies for the distribution, storage and consumption of media content, weakness in advertising revenues and increases in paper costs, printing costs and postal rates. The result has been reduced subscription sales, which has caused publishers to close some magazine titles, change subscription fulfillment providers and seek more favorable terms from Palm Coast and its competitors when contracts are up for bid or renewal. One customer of the fulfillment services business whose revenues were approximately 10.6% of the total Company revenues for the first six months of 2018 has given notice that a significant portion of its business will be transferred from Palm Coast during 2018. Operating and selling expenses for fulfillment services decreased from $6,707,000 and $13,380,000 for the second quarter and first six months of 2017 to $5,983,000 and $12,077,000 for the same periods in 2018, primarily attributable to lower payroll and benefits, resulting from reduced business volumes, together with lower communications, software and equipment maintenance costs.

Other revenues were $86,000 and $1,492,000 for the second quarter and first six months of 2018 compared to $78,000 and $1,738,000 for the same periods of 2017. Other revenues for the first six months of 2018 were primarily due to a pre-tax gain of $1,318,000 related to a settlement agreement with the State of Florida by Palm Coast (refer to Note 6 of the notes to the consolidated financial statements included in this report on Form 10-Q). Other revenues for the first six months of 2017 were primarily the result of the sale of a retail commercial property by AMREP Southwest, which resulted in a pre-tax gain of $1,496,000. Operating and selling expenses for real estate increased from $407,000 and $818,000 for the second quarter and first six months of 2017 to $582,000 and $1,093,000 for the same periods of 2018, primarily due to increased employee costs, land maintenance expenses and broker commissions on sales activity, offset in part by lower consulting costs.

Fulfillment services general and administrative expenses decreased from $327,000 and $680,000 for the second quarter and first six months of 2017 to $308,000 and $657,000 for the same periods of 2018, primarily due to lower payroll and benefits, professional costs, bank fees and amortization of intangible assets. Real estate general and administrative expenses decreased from $134,000 and $303,000 in the second quarter and first six months of 2017 to $86,000 and $200,000 for the same periods in 2018, primarily due to reduced costs related to payroll and benefits, rent, outside services and insurance. Corporate general and administrative expenses decreased from $744,000 and $1,577,000 in the second quarter and first six months of 2017 to $696,000 and $1,504,000 for the same periods of 2018, primarily due to lower professional fees and pension costs, offset in part by increased payroll and benefits costs.

Interest expense was $18,000 and $31,000 for the second quarter and first six months of 2018 compared to $82,000 and $306,000 for the same periods of 2017. Interest expense in 2018 was primarily related to the settlement and remaining liability with the State of Florida noted above and interest expense in 2017 was primarily related to two notes payable of AMREP Southwest that were paid in full during 2017. There was no capitalized interest for the first six months of 2018 compared to $38,000 for the same period in 2017.

The Company’s effective tax rate was 23.4% and 33.0% for the second quarter and first six months of 2018 compared to 6.7% and 31.7% for the same periods of 2017. The difference between the statutory tax rate and the effective rate of the tax provision in 2018 and 2017 was primarily due to state income taxes. The total tax effect of gross unrecognized tax benefits in the accompanying financial statements at both October 31, 2017 and April 30, 2017 was $58,000, which, if recognized, would have an impact on the effective tax rate. The Company believes it is reasonably possible that the liability for unrecognized tax benefits will not change in the next twelve months. 

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funding for working capital requirements are cash flow from operations and existing cash balances. The Company may also seek bank financing on specific real estate projects. The Company’s liquidity is affected by many factors, including some that are based on normal operations and some that are related to the industries in which the Company operates and the economy generally. Except as described below, there have been no material changes to the Company’s liquidity and capital resources as reflected in the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2017 Form 10-K.

Refer to Note 9 to the consolidated financial statements contained in the 2017 Form 10-K for detail about the settlement agreement entered into between Palm Coast and the State of Florida in the first quarter of 2018. As a result of the settlement agreement, in the first quarter of 2018, Palm Coast reduced its previously recorded liability of $3,000,000 and a related $26,000 interest accrual by $1,620,000 to $1,406,000 by recognizing a pre-tax gain of $1,318,000 and recording a deferred gain of $302,000. In connection with the settlement, Palm Coast made a payment of $163,000 to the State of Florida during the first quarter of 2018 thereby reducing its remaining liability to $1,243,000. The $1,318,000 pre-tax gain is included in Other revenues in the accompanying financial statements. The deferred gain of $302,000 was reduced to $262,000 as of October 31, 2017, which $262,000 will be recognized over a period of seven and a half years from October 31, 2017.

Operating Activities

Accounts payable and accrued expenses increased from $7,035,000 at April 30, 2017 to $7,271,000 at October 31, 2017, primarily due to the timing of payments to vendors.

Real estate inventory decreased from $56,090,000 at April 30, 2017 to $55,930,000 at October 31, 2017, due to real estate land sales at AMREP Southwest. Property, plant and equipment decreased from $10,852,000 at April 30, 2017 to $10,246,000 at October 31, 2017 due to normal depreciation of fixed assets.

Other liabilities and deferred revenue decreased from $3,376,000 at April 30, 2017 to $1,756,000 at October 31, 2017, primarily due to the previously described settlement agreement between Palm Coast and the State of Florida.

Investing Activities

Capital expenditures totaled $29,000 for the first six months of 2018 and $49,000 for the same period of 2017, all for the fulfillment services business.

Statement of Forward-Looking Information

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that are “forward-looking”, including statements contained in this report and other filings with the Securities and Exchange Commission, reports to the Company’s shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, “forecasts”, “may”, “should”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and contingencies that are difficult to predict. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are qualified by the cautionary statements in this section. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements.

The forward-looking statements contained in this report include, but are not limited to, the expected loss of a material customer contract and the effect of such loss, the effect of recent accounting pronouncements on the Company, the timing of recognizing unrecognized compensation expense related to shares of restricted common stock issued under the Equity Plans, the liability for unrecognized tax benefits not changing in the next twelve months, the seeking of bank financing for real estate projects and the future business conditions that may be experienced by the Company. The Company undertakes no obligation to update or publicly release any revisions to any forward-looking statement to reflect events, circumstances or changes in expectations after the date of such forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.