AMCON Distributing Company — Q2 2014 Form 10-Q
Reporting period: Three and six months ended March 31, 2014; fiscal year ends September 30. The company operates wholesale consumer-products distribution and 16 natural/health-food retail stores. Financial statements are unaudited.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $272.4 million | $274.6 million | $578.0 million | $576.8 million |
| Gross profit / margin | $17.6 million / 6.5% | $18.3 million / 6.7% | $37.3 million / 6.4% | $37.5 million / 6.5% |
| Operating income | $1.18 million | $2.26 million | $3.70 million | $5.05 million |
| Net income | $0.53 million | $1.21 million | $1.82 million | $2.68 million |
| Net income available to common shareholders | $0.48 million | $1.17 million | $1.72 million | $2.57 million |
| Diluted EPS | $0.72 | $1.63 | $2.46 | $3.55 |
Reported sales include substantial cigarette and tobacco excise taxes: $85.7 million in Q2 2014 and $183.1 million in the six-month period. Sales are net of retailer incentives.
Liquidity, cash flow and debt
- Six-month operating cash flow was $37,000, versus $1.10 million a year earlier. Investing used $1.85 million, including $1.36 million of capital expenditures and $0.51 million for an acquisition. Financing provided $1.93 million.
- Cash was $0.40 million at March 31, 2014. Working capital was $58.6 million, compared with $53.4 million at September 30, 2013. Current assets were $82.9 million and current liabilities $24.2 million.
- Credit-facility borrowings were $19.8 million, up from $14.8 million at September 30. The facility’s borrowing limit, subject to collateral availability, was $61.6 million; $41.8 million was available. Average facility interest rate was 2.10% at quarter-end.
- Long-term debt, including current maturities, totaled approximately $4.47 million. Total reported borrowings including the credit facility were approximately $24.2 million. The facility matures in July 2018 and includes a conditional fixed-charge coverage covenant.
- The company repurchased $1.94 million of common and Series B preferred stock during the six months and paid $0.34 million in common and preferred dividends.
Changes and management commentary
- Q2 sales fell 0.8% year over year, while gross profit declined 3.7%, operating income 47.8%, and net income 56.2%. For the six months, sales edged up 0.2%, but operating income fell 26.6% and net income 32.0%.
- Wholesale Q2 sales declined 0.6%; lower cigarette volume and mix more than offset manufacturer price increases and growth in other product categories. Wholesale gross margin narrowed to 5.2% from 5.3%.
- Retail Q2 sales declined 6.9%, reflecting lower comparable-store sales amid competition, partly offset by new-store sales. Six-month retail sales declined 4.6%. Management cited pressure on Midwest stores from expanding regional and national chains and online sales.
- Operating expenses increased 2.5% in Q2 and 3.3% for six months. Management attributed increases primarily to new-store operating costs and higher health-insurance costs.
- In Q2, AMCON acquired approximately $0.5 million of inventory and began servicing customers of a small North Dakota convenience-store distributor. No material intangible assets or liabilities were assumed; the transaction was described as immaterial.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said it expects the retail competitive environment to persist and potentially accelerate, and is pursuing merchandising, marketing and procurement initiatives. It sees opportunity in wholesale-industry consolidation and in expanding higher-margin foodservice products and customer programs.
Risks highlighted include cigarette and tobacco demand, excise taxes and regulation, electronic-cigarette growth, manufacturer pricing and incentives, competition, commodity and fuel costs, inventory and customer-credit risk, acquisitions and store expansion, and access to capital. Cash flow is subject to inventory timing and seasonality; management noted that higher seasonal inventory can pressure cash. The company does not hedge interest-rate or fuel-cost exposure. Management believed liquidity would be adequate for operations but cautioned that a sharp operating change could affect revenue, collections and access to bank credit.
The company reported no legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. It had a $0.4 million letter of credit for its workers’ compensation program. Disclosure controls were assessed as effective; no material changes to internal control over financial reporting were reported.
Key facts for investors to verify
- Whether the sharp year-over-year profit and margin declines continue, particularly given cigarette volume and mix trends.
- Comparable-store sales, profitability and the effectiveness of retail initiatives amid intensified competition.
- Working-capital conversion and seasonal inventory needs, given near-flat operating cash flow and reliance on credit-facility borrowings.
- Facility availability and covenant headroom as receivables and inventory fluctuate; the facility is secured and its borrowing base can change.
- Effects of stock repurchases, preferred-stock dividends and potential dilution from convertible preferred stock and equity awards.