AMCON Distributing Company — Q3 2011 Form 10-Q
Reporting period: Third quarter and nine months ended June 30, 2011; fiscal year ends September 30. AMCON distributes consumer products to approximately 5,000 retail outlets and operates 14 health-food stores.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $263.8 million | $267.1 million | $725.4 million | $741.5 million |
| Gross profit | $18.2 million | $19.1 million | $52.2 million | $53.3 million |
| Gross margin | 6.9% | 7.2% | 7.2% | 7.2% |
| Operating income | $3.9 million | $4.6 million | $10.3 million | $10.8 million |
| Net income | $1.8 million | $2.7 million | $5.2 million | $6.3 million |
| Diluted EPS | $2.36 | $3.67 | $6.81 | $8.39 |
Reported sales include excise taxes. Q3 sales fell 1.2% and net income fell 33.5%; nine-month sales declined 2.2% and net income declined 16.3%. Q3 SG&A and depreciation/amortization totaled $14.3 million, down 1.4%. The effective tax rate increased to 49.5% in Q3 and 44.3% year to date, primarily due to IRS limits on deductibility of certain expenses.
Cash, liquidity and debt
- Operating cash flow was negative $11.5 million for the nine months, versus negative $0.2 million in the prior-year period. Higher inventory and prepaid assets were key uses of cash.
- Investing cash flow was negative $14.9 million, including the LPS acquisition and capital expenditures. Financing cash flow was positive $27.5 million, principally from $28.5 million of net credit-facility borrowings.
- Cash was $1.3 million at June 30, 2011, versus $0.4 million at September 30, 2010. Working capital was $72.4 million, compared with $39.1 million at fiscal year-end.
- Credit-facility borrowings were $47.4 million; approximately $22.3 million of borrowing capacity remained under the calculated $69.7 million limit. The facility’s stated revolving commitment is $70 million and matures in April 2014. Average facility interest rate at quarter-end was 2.93%.
- Long-term debt, including current maturities, was approximately $8.0 million. Total facility borrowings and long-term debt were therefore approximately $55.3 million.
Business developments and outlook
- On May 27, AMCON acquired L.P. Shanks Company’s convenience-store distribution assets, expanding its Southeastern footprint. Consideration was $16.4 million: $13.4 million cash, a $2.6 million seller note, and $0.4 million related to a non-compete agreement. LPS had annual sales of approximately $200 million; $20.9 million of acquired-business sales were included in the period’s reported results.
- Wholesale Q3 sales declined 1.4% despite $20.9 million from LPS and $4.6 million from manufacturer cigarette-price increases; lower cigarette volume/mix and other product sales offset those gains. Wholesale gross margin fell to 5.6% from 5.8%.
- Retail sales increased 3.1% in Q3 and year to date, but Q3 retail gross margin declined to 42.5% from 44.2%. Management cited improved sales in Oklahoma and Florida, while noting competition and commodity-price pressure.
- Management expects liquidity to be adequate to sustain operations, but cautioned that a sharp market deterioration could affect revenue, receivable collections, and access to bank credit. It provided no quantified earnings or revenue guidance.
- Identified risks include cigarette and tobacco demand, excise taxes and regulation, manufacturer pricing, food commodity and fuel costs, inventory carrying costs, customer credit, competition, industry consolidation, acquisition integration, and capital availability. The company does not hedge interest-rate or fuel-cost exposure.
Other notable disclosures
AMCON reported no legal proceedings, no off-balance-sheet arrangements, no material change in disclosed risk factors, and no material changes to internal control over financial reporting. Management concluded disclosure controls were effective as of June 30, 2011. Series B preferred holders converted 18,000 shares into 18,255 common shares during the quarter.
Important facts for investors to verify
- Whether inventory levels and working-capital cash use normalize after seasonal purchasing and the LPS acquisition.
- Actual LPS contribution, integration costs, and acquisition performance versus the pro forma figures.
- Borrowing-base availability as receivables and inventory fluctuate, and compliance with the facility’s conditional fixed-charge coverage covenant.
- Whether cigarette-volume declines, lower wholesale margins, and elevated effective tax rates persist.
- The impact of commodity costs, customer credit quality, regulation, and competitive pressures on future results.