AMCON Distributing Company — Q2 FY2013 Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2013; comparison is with the same periods in 2012. AMCON distributes consumer products through its wholesale segment and operates 14 natural-food retail stores. Interim results may not indicate full-year performance.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Sales | $274.6M | $275.8M | $576.8M | $559.4M |
| Gross profit / margin | $18.3M / 6.7% | $19.2M / 7.0% | $37.5M / 6.5% | $37.9M / 6.8% |
| Operating income | $2.3M | $2.7M | $5.0M | $5.4M |
| Net income | $1.2M | $1.5M | $2.7M | $2.9M |
| Basic / diluted EPS | $1.87 / $1.63 | $2.26 / $1.87 | $4.13 / $3.55 | $4.47 / $3.70 |
Reported sales include excise taxes and are net of retailer incentives. In Q2, wholesale sales fell 0.4% and retail sales fell 2.7%; wholesale gross profit declined 6.0%, while retail gross profit declined 0.8%. For the six-month period, sales rose 3.1%, but gross profit fell 0.9%. Wholesale sales growth reflected manufacturer price increases, higher state excise taxes and stronger sales in other product categories, partly offset by lower cigarette volume and mix. Retail sales were pressured by competition at Akin’s stores.
Cash flow, liquidity and debt
- Six-month operating cash flow was $1.1M, versus $3.7M a year earlier. Investing used $1.0M, primarily for property and equipment; financing used $0.2M. Cash declined $58,530 to $0.43M.
- At March 31, working capital was $54.2M, compared with $49.9M at September 30, 2012. Current assets were $78.5M and current liabilities $24.3M.
- Credit-facility borrowings were $17.7M; the borrowing-base limit was $61.4M, leaving $43.7M available. The $70M facility matures in April 2014; its average interest rate at quarter-end was 2.63%. Availability depends on eligible receivables and inventory.
- Including current and long-term debt, reported borrowings were approximately $23.4M, versus approximately $20.6M at September 30, 2012. The company drew $3.4M net on its credit facility during the six months and repaid $0.6M of long-term debt.
Material changes, outlook and risks
- Q2 net income declined 17.1%; lower gross profit was partly offset by a 2.9% reduction in operating expenses and lower interest expense. Six-month net income declined 7.8% despite higher sales.
- During the first fiscal quarter, AMCON repurchased 38,000 Series B preferred shares and 1,255 common shares for about $2.5M. It also repurchased 12,954 common shares in a separate transaction for cash and other consideration totaling about $0.8M.
- Management expected a competitive, challenging wholesale environment, citing industry consolidation, margin pressure and tobacco-tax proposals. It was developing foodservice, merchandising and technology offerings. Management also planned to open two Akin’s stores in Arkansas and Nebraska during fiscal 2013; no quantified earnings or revenue guidance was provided.
- Retail natural-food demand remained strong, but well-capitalized competitors and new stores near AMCON locations were pressuring customer retention and margins. Other disclosed risks include tobacco regulation and taxes, supplier price increases, customer credit risk, inventory costs, fuel and commodity prices, and access to capital. AMCON did not hedge interest-rate or fuel-cost exposure.
- Management stated that liquidity should be adequate to sustain operations, while warning that a sharp change in operating conditions could affect revenue, collections or bank-credit access. The credit facility includes collateral-based borrowing limits and a fixed-charge coverage covenant that applies if availability falls below a specified threshold.
No material changes to previously reported risk factors or contractual obligations were disclosed. The filing reported no legal proceedings or off-balance-sheet arrangements, and management concluded disclosure controls were effective as of March 31, 2013.
Investor verification points
- Check whether the decline in cigarette volume and mix, and wholesale gross-margin compression, continued after Q2.
- Track operating cash conversion, seasonal inventory needs, credit-facility availability and the April 2014 facility maturity.
- Verify execution, investment needs and performance of the two planned Akin’s store openings amid intensifying competition.
- Review the effects of the share repurchases, preferred-stock conversions and equity awards on common-share dilution and per-share results.
- Monitor tobacco-tax and regulatory developments, customer credit quality, and unhedged fuel and interest-rate exposure.