AMCON Distributing Company — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014; comparisons are with the three months ended December 31, 2013. AMCON distributes consumer products to approximately 4,500 retail outlets and operates 16 natural/health food stores. Interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Sales | $315.4 million | $305.6 million | +3.2% |
| Gross profit | $19.5 million | $19.6 million | -0.6% |
| Gross margin | 6.2% | 6.4% | -0.2 percentage points |
| Operating income | $2.8 million | $2.5 million | +9.7% |
| Net income | $1.5 million | $1.3 million | +20.0% |
| Net income available to common shareholders | $1.5 million | $1.2 million | +20.8% |
| Basic / diluted EPS | $2.44 / $2.11 | $1.99 / $1.73 | Higher |
Sales include excise taxes of $96.9 million in Q1 FY2015 and $97.3 million in Q1 FY2014. Interest expense declined 21.5% to $237,142; the effective tax rate was 39.1%, versus 42.8%.
Segments
- Wholesale: Sales rose 3.6% to $307.7 million; gross profit increased 1.5% to $16.3 million, while gross margin eased to 5.3% from 5.4%.
- Retail health food: Sales fell 8.8% to $7.8 million and gross profit fell 9.9% to $3.3 million; gross margin was 42.1% versus 42.7%. Management cited increased competition, particularly affecting Midwest stores.
Cash flow, liquidity and debt
- Operating activities used $4.9 million of cash, improved from $10.4 million used a year earlier. Working-capital outflows included inventory, prepaid assets, accrued expenses and taxes payable.
- Investing activities used $0.3 million, mainly for capital expenditures. Financing activities provided $5.3 million, including $5.7 million in net credit-facility borrowings.
- Cash was $0.2 million at December 31, 2014. Working capital was $64.3 million, up from $55.8 million at September 30, 2014.
- Credit-facility borrowings were $20.8 million; the company reported $48.8 million available under the facility at quarter-end. Peak borrowings during the quarter were $40.2 million; average borrowings were $30.4 million. The average facility interest rate at quarter-end was 2.17%.
- Long-term debt, including current maturities, totaled approximately $4.0 million. The revolving facility has a $70 million stated limit, matures in July 2018, and is secured by company assets. Facility availability had not fallen below the threshold triggering the fixed-charge coverage covenant; the company reported its ratio was above 1.0.
- Common and preferred dividends paid totaled approximately $0.2 million. A $0.4 million letter of credit supports the workers’ compensation program. The company reported no off-balance-sheet arrangements.
Changes, outlook and risks
- Wholesale sales gains reflected cigarette manufacturer price increases (+$6.5 million) and higher sales in other product categories (+$5.5 million), partly offset by a $1.4 million decline from cigarette carton volume and mix. Retail sales weakness offset some wholesale growth.
- Consolidated gross profit declined despite higher sales; lower operating expenses—partly from reduced health-insurance costs and retail operating costs—helped lift operating income.
- Management said wholesale distributor margins remain pressured and competition is intense. It is emphasizing customizable customer programs and higher-margin foodservice categories. Lower fuel prices did not benefit AMCON in the quarter because of increased miles driven and fuel use by newer refrigerated trucks.
- Management expects strong competition in natural/health food retail to persist or intensify. It described liquidity as adequate for operations and prioritizing short-term liquidity to allow patient deployment of capital, including possible strategic investments or acquisitions. No numerical earnings or revenue guidance was provided.
- Risks include tobacco demand and regulation, e-cigarette adoption, retail and wholesale competition, fuel and commodity costs, customer credit and inventory carrying costs, access to capital, and acquisition or expansion risks. The filing reported no material change to previously disclosed risk factors, no legal proceedings, and no material change in internal control; disclosure controls were considered effective.
- Q1 FY2015 included 13,000 restricted stock unit awards to executives, generally vesting over three years; recipients may elect cash or shares at vesting. The filing does not identify a material unusual operating charge.
Investor facts to verify
- Whether wholesale sales growth reflects sustainable volume and product mix, rather than primarily supplier price increases.
- Whether retail sales and gross profit stabilize amid intensified competition, especially in Midwest locations.
- Working-capital and seasonal cash-flow trends, including inventory build and customer collections, and the resulting dependence on credit-facility borrowings.
- Facility availability, borrowing-base limits and covenant headroom as receivables and inventory fluctuate.
- Potential dilution or cash-settlement costs from preferred stock conversion and outstanding equity awards.