AMCON Distributing Company — Q3 FY2015 Form 10-Q
Reporting period: Quarter ended June 30, 2015; year-to-date figures cover the nine months ended June 30, 2015. Comparisons are with the corresponding 2014 periods. AMCON distributes consumer products wholesale and operates 16 natural-food retail stores. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $334.5 | $322.6 | $937.3 | $900.7 |
| Gross profit | $19.5 | $19.3 | $56.8 | $56.6 |
| Gross margin | 5.8% | 6.0% | 6.1% | 6.3% |
| Operating income | $3.6 | $2.4 | $8.0 | $6.1 |
| Net income | $2.0 | $1.3 | $4.3 | $3.1 |
| Diluted EPS | $2.69 | $1.73 | $5.85 | $4.18 |
Sales include excise taxes; reported sales are net of retailer incentives. Q3 sales rose 3.7%, operating income 45.4%, and net income 58.4% year over year. For the nine months, sales rose 4.1% and net income 40.0%.
Segments and material changes
- Wholesale: Q3 sales increased 4.0% to $326.7 million; gross profit increased 4.2% to $16.3 million, with gross margin steady at 5.0%. Year-to-date sales increased 4.5% to $913.6 million. Management attributed growth largely to manufacturer cigarette price increases and higher sales in other product categories.
- Retail: Q3 sales declined 9.0% to $7.7 million and gross profit fell 12.4% to $3.2 million; gross margin decreased to 40.9% from 42.5%. Nine-month sales declined 9.4% to $23.8 million. Management cited increased competition and lower store sales volume.
- Consolidated gross profit grew only modestly despite higher sales, while operating expenses fell 5.4% in Q3 and 3.2% year to date. Management cited lower delivery, health-insurance, and retail operating costs, partly offset by higher compensation and other costs.
Cash flow, liquidity, and debt
- The cash flow statement reports $2.6 million of cash generated from operating activities in the first nine months, versus $1.2 million in 2014. Investing used $0.8 million and financing used $1.7 million; cash increased about $0.05 million to $0.15 million.
- Working capital was $60.7 million at June 30, 2015, compared with $55.8 million at September 30, 2014. Current assets were $89.0 million and current liabilities $28.2 million.
- Credit-facility borrowings were $14.3 million; the filing reports $55.3 million available against a borrowing limit of $69.6 million. Average facility interest rate at quarter-end was 2.27%. The facility matures in July 2018.
- Long-term debt, including current maturities, was approximately $3.8 million. Total facility and long-term debt was approximately $18.1 million, down from approximately $19.2 million at September 2014.
- Facility availability had not fallen below the 10% threshold that triggers the fixed-charge coverage covenant; the company reported a ratio above 1.0. The facility restricts common dividends in certain circumstances. AMCON reported no off-balance-sheet arrangements and a $0.4 million workers’ compensation letter of credit.
Outlook, risks, and other disclosures
No numerical guidance was provided. Management said wholesale competition and margin pressure remain significant, and described technology and temperature-controlled delivery investment and opportunistic acquisitions as longer-term priorities. It expects strong competition in natural-food retail to persist or increase and is focusing on customer retention and store-level cost structure. Management considered liquidity adequate but warned that adverse operating changes could affect revenue, receivables collections, and access to bank credit.
Risks discussed include tobacco demand, excise taxes and regulation, electronic-cigarette competition, fuel and commodity costs, customer credit, manufacturer pricing and incentives, and competition in both segments. Management stated there were no material changes to previously disclosed risk factors. No legal proceedings were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Notable disclosure inconsistency: The cash flow statement shows positive operating cash flow of $2.6 million, but the MD&A overview says the company “used cash” of approximately $2.6 million for operating activities. The underlying cash flow statement reports cash generated; verify this discrepancy.
Important facts for investors to verify
- Reconcile the MD&A operating-cash-flow description with the positive amount in the cash flow statement.
- Assess whether wholesale sales growth, partly driven by cigarette price increases, can sustain profits as gross margins narrow.
- Monitor continued sales and margin declines in the retail segment amid intensifying competition.
- Review working-capital needs and borrowing availability, particularly as inventory increased and seasonal purchasing can absorb cash.
- Consider potential dilution from convertible preferred stock and equity awards; diluted weighted-average shares exceeded basic shares.