AMCON Distributing Company — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended March 31, 2012, compared with the corresponding 2011 periods. AMCON distributes consumer products through its wholesale business and operates 14 health-food stores. Figures below are unaudited.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Sales | 2012: $275.8 million; 2011: $216.6 million; up 27.3% | 2012: $559.4 million; 2011: $461.6 million; up 21.2% |
| Gross profit / gross margin | $19.2 million / 7.0%; prior year $16.4 million / 7.6% | $37.9 million / 6.8%; prior year $34.0 million / 7.4% |
| Operating income | $2.7 million, down 8.5% from $3.0 million | $5.4 million, down 15.7% from $6.4 million |
| Net income | $1.5 million, down from $1.6 million | $2.9 million, down from $3.4 million |
| Net income available to common shareholders | $1.4 million; diluted EPS $1.87, versus $1.5 million and $2.05 | $2.8 million; diluted EPS $3.70, versus $3.3 million and $4.47 |
Interest expense rose 21.2% to $0.32 million in the quarter and 14.7% to $0.74 million for six months. Excise taxes included in sales were $86.1 million for the quarter and $176.6 million for six months in 2012, versus $70.8 million and $152.1 million, respectively, in 2011.
Segments and drivers
- Wholesale: Quarterly sales increased 28.5% to $265.7 million; six-month sales increased 22.2% to $540.7 million. L.P. Shanks (LPS), acquired in May 2011, contributed $44.4 million of quarterly and $90.7 million of six-month sales growth. Price increases and other product sales also contributed, while six-month cigarette volume and mix reduced growth.
- Wholesale gross margin declined to 5.6% from 5.9% in the quarter and to 5.5% from 5.8% for six months. Management attributed the pressured margins to intense competition. LPS added gross profit, but related operating costs, higher bad-debt expense, and other costs absorbed the benefit.
- Retail: Quarterly sales rose 2.4% to $10.1 million, with gross margin improving to 43.5%. Six-month sales fell 1.7% to $18.7 million and gross profit declined 2.2%, amid competition affecting Akin’s stores; Florida Chamberlin’s stores improved.
Cash flow, balance sheet, and debt
- Six-month operating cash flow was $3.7 million, versus $5.5 million a year earlier. Investing used $0.7 million, primarily for property and equipment; financing used $3.5 million, including credit-facility and term-debt repayments, dividends, and a share repurchase. Cash declined $0.5 million to $0.85 million.
- Working capital was $49.7 million at March 31, 2012, versus $49.0 million at September 30, 2011. Current assets were $76.6 million and current liabilities $26.9 million.
- Credit-facility borrowings were $19.3 million; the borrowing base allowed $60.1 million of capacity, leaving $40.8 million available. The $70 million facility matures in April 2014, is secured by receivables, inventory, equipment, and intangibles, and had an average interest rate of 2.28% at period-end. Peak six-month borrowings were $50.7 million.
- Long-term debt, including current maturities, totaled approximately $6.8 million. Credit-facility borrowings and long-term debt together were approximately $26.2 million. Management reported no BMO cross-defaults. A fixed-charge coverage covenant applies if excess availability falls below 10% of the maximum loan limit.
Outlook, risks, and notable items
- No specific financial guidance was provided. Management said liquidity should be adequate to sustain operations, while noting that a sharp change in market conditions could affect revenue, collections, or access to bank credit.
- Management sees acquisition opportunities in a fragmented convenience-store distribution industry and is seeking retail expansion opportunities. It cited continued industry competition, higher food and fuel prices, and pressure on customers’ discretionary sales.
- Disclosed risks include tobacco excise-tax increases and regulation, acquisition integration, commodity and manufacturer price increases, customer credit risk, inventory carrying costs, competition, fuel prices, and access to capital. The company does not hedge interest-rate or fuel-cost exposure.
- AMCON repurchased 17,000 shares at $54 per share for $918,000 during the quarter, funded with operating cash and revolving credit. It had 33,000 shares remaining under its previously authorized 50,000-share repurchase plan.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. It maintained a $0.4 million workers’ compensation letter of credit. Management concluded disclosure controls were effective at March 31, 2012.
Important facts for investors to verify
- How much of revenue and gross-profit growth is attributable to the LPS acquisition, and whether its integration costs and margins improve.
- Whether wholesale margin pressure, bad-debt expense, and customer consolidation continue to affect operating income and cash generation.
- Availability under the borrowing base as receivables and inventory fluctuate, and compliance with facility covenants and cross-default provisions.
- The effect of preferred dividends, convertible preferred shares, and equity awards on common-shareholder earnings and dilution.
- Whether retail sales weakness at Akin’s persists and Florida store improvement continues.