AMCON Distributing Company — Q1 FY2014 Form 10-Q
Business context and period. The filing covers the three months ended December 31, 2013, compared with the three months ended December 31, 2012. AMCON operates a wholesale consumer-products distribution business and a retail health-food business with 16 stores. Its fiscal year ends September 30; interim results may not indicate full-year performance.
Financial performance and position
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Sales | $305.6 million | $302.2 million |
| Gross profit / margin | $19.6 million / 6.4% | $19.2 million / 6.4% |
| Operating income | $2.5 million | $2.8 million |
| Income before tax | $2.3 million | $2.5 million |
| Net income | $1.3 million | $1.5 million |
| Net income available to common shareholders | $1.2 million; diluted EPS $1.73 | $1.4 million; diluted EPS $1.90 |
| Operating cash flow | $(10.4) million | $(13.2) million |
- Sales rose 1.1%, while operating expenses increased 4.1%; operating income fell 9.4% and net income fell 11.9% year over year.
- Wholesale sales increased 1.2% to $297.1 million; segment gross margin was 5.4%, versus 5.3%. Retail sales declined 2.1% to $8.5 million; retail gross margin was 42.7%, versus 42.1%.
- Cash was $326,390 at December 31. Working capital was $67.3 million, up from $53.4 million at September 30; current assets were $91.9 million and current liabilities $24.6 million.
- Credit-facility borrowings were $28.7 million, up from $14.8 million at September 30. Long-term debt, including current maturities, totaled about $4.8 million. Total reported borrowings across these items were about $33.5 million, versus $19.9 million at September 30.
- The facility’s borrowing limit was $69.6 million; $40.9 million was available at quarter-end. Average borrowings during the quarter were $39.1 million, peak borrowings $54.0 million, and average availability $29.9 million. The average facility interest rate was 1.91% at quarter-end.
- Investing cash outflow was $1.0 million, mainly for property and equipment. Financing activities provided $11.4 million, including $13.9 million of net facility borrowings. Cash increased by $51,354 during the quarter.
Material changes and management commentary
- Wholesale sales gains reflected $5.9 million from cigarette manufacturer price increases and $4.2 million from higher sales in other product categories, partly offset by a $6.5 million decline related to cigarette carton volume and mix. Cigarettes accounted for $221.2 million of reported sales, which include excise taxes.
- Retail sales were pressured by increased competition, particularly at Akin’s stores; two stores opened in the prior fiscal year partly offset the decline. Management expects the competitive environment to persist and potentially intensify.
- Operating expenses rose $0.7 million, including increases in insurance and employee costs and expenses at the two newer retail stores. Management’s stated priorities include improving wholesale merchandising and margins, expanding customer-facing technology and services, pursuing strategic growth opportunities, and growing retail sales through marketing and promotions.
- Management said operating cash use reflected increases in receivables, inventory and prepaid assets, and reductions in accrued expenses and income taxes payable. It noted that seasonal inventory needs and opportunistic inventory purchases can create temporary cash outflows. Management believes liquidity will be adequate to sustain operations, but warns that a sharp change in conditions could affect revenue, collections or access to bank credit.
Outlook, risks and unusual items
- The filing provides no quantified earnings, sales or cash-flow guidance. Forward-looking statements are subject to risks including cigarette and tobacco demand, excise taxes and regulation, competition, manufacturer pricing and incentives, customer credit, inventory costs, fuel prices, capital availability, acquisitions and execution, and weather or other disruptions.
- The Bank of America facility matures in July 2018 and is secured by equipment, intangibles, inventory and receivables. A fixed-charge coverage covenant applies if excess availability falls below 10% of the maximum loan limit. The company reported no cross-defaults at quarter-end.
- AMCON repurchased 25,057 common shares for approximately $1.9 million at an average $77.50 per share. The board subsequently authorized repurchases of up to 50,000 additional shares.
- The company issued 17,900 restricted stock units during the quarter; awards may be settled in shares or cash, subject to vesting. Preferred stock had a $2.9 million total liquidation preference and cumulative dividends.
- AMCON reported no legal proceedings, no off-balance-sheet arrangements, no material changes to previously disclosed risk factors, and effective disclosure controls as of December 31, 2013.
Most important facts for investors to verify
- Whether the rise in wholesale sales and gross margin can offset cigarette-volume pressure and the decline in retail sales.
- Whether receivables and inventory growth reverse as management expects, given negative operating cash flow and increased facility borrowing.
- Facility availability and covenant headroom as collateral balances and seasonal borrowing needs fluctuate.
- The scale and persistence of retail competition and its effect on store-level sales and profitability.
- The effects of share repurchases, equity awards, and preferred-stock conversion or dividends on common-shareholder value.