AMCON Distributing Company — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 31, 2012; comparisons are with the three months ended December 31, 2011. AMCON distributes consumer products through its wholesale segment and operates 14 natural-food retail stores. Sales include substantial cigarette and tobacco excise taxes.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Sales | $302.2 million | $283.6 million | +6.6% |
| Gross profit | $19.2 million | $18.6 million | +3.2% |
| Gross margin | 6.4% | 6.6% | Down 0.2 percentage points |
| Operating income | $2.8 million | $2.7 million | +4.2% |
| Interest expense | $316,000 | $424,000 | Down 25.5% |
| Net income | $1.46 million | $1.44 million | +1.7% |
| Net income available to common shareholders | $1.40 million | $1.37 million | — |
| Basic / diluted EPS | $2.26 / $1.90 | $2.21 / $1.83 | Higher |
- Wholesale sales rose 6.7% to $293.5 million; wholesale gross margin declined to 5.3% from 5.5%. Retail sales rose 2.0% to $8.7 million; retail gross margin was 42.1%, versus 42.0%.
- Management attributed wholesale sales growth to cigarette manufacturer price increases ($6.0 million), cigarette carton volume and mix ($4.8 million), higher state excise taxes ($4.8 million), and growth in other product categories ($2.9 million). These drivers indicate that reported sales growth was not solely volume-driven.
- Operating expenses increased 3.0% to $16.4 million, primarily due to higher compensation and other operating costs.
Cash flow, liquidity and debt
- Operating activities used $13.2 million of cash, compared with $7.5 million used in the prior-year quarter. The principal use was an $11.4 million inventory increase; accounts payable, accrued liabilities, and income taxes payable also declined.
- Investing activities used $191,000, including $330,000 of capital expenditures. Financing activities provided $12.9 million, including $16.0 million of net credit-facility borrowings.
- Cash at December 31 was $34,802, down from $491,387 at September 30. Working capital was $66.2 million, up from $49.9 million at September 30, reflecting higher inventory and other current assets.
- Credit-facility borrowings were $30.4 million, versus $14.4 million at September 30. The facility’s borrowing limit, based on eligible collateral, was $69.6 million, leaving $39.2 million available. Average facility borrowings during the quarter were $33.9 million; the average interest rate at quarter-end was 2.52%.
- The facility has a $70 million revolving limit, matures in April 2014, and is secured by receivables, inventory, equipment, and intangibles. It includes a conditional fixed-charge coverage covenant and limits common dividends to $1.00 per share annually. Long-term debt, including current maturities, was approximately $6.0 million at quarter-end.
Material changes, outlook and risks
- During the quarter, AMCON repurchased 38,000 Series B preferred shares and 1,255 common shares for approximately $2.5 million. It also repurchased 12,954 common shares in a separate transaction for approximately $0.8 million in cash and other consideration. Series B preferred shares outstanding fell to 16,000 from 58,000.
- Management said operating cash flows vary with inventory purchase timing and seasonal needs, and that inventory build-related cash outflows may reverse in later periods. It considered liquidity adequate to sustain operations, while warning that a sharp deterioration in conditions could affect revenue, receivable collections, and access to bank credit.
- AMCON planned to open two Akin’s stores in Arkansas and Nebraska during FY2013 and continued to pursue acquisition opportunities. No quantified earnings or revenue guidance was provided.
- Management cited tobacco taxes and regulation, possible FDA restrictions, supplier price changes, commodity and fuel costs, customer credit risk, competition, industry consolidation, and acquisition integration as risks. It reported no material change to previously disclosed risk factors, no legal proceedings, and no off-balance-sheet arrangements.
- Retail management described Florida stores as benefiting from demand for natural products and improved local economic conditions; Akin’s continued to face increased competition from regional and national chains. Wholesale management emphasized competitive pressure and industry changes, while noting steady demand for convenience shopping.
Important facts for investors to verify
- Whether the inventory build is seasonal or reflects a sustained working-capital requirement, and how quickly operating cash flow recovers.
- How much of wholesale sales growth reflects product volume and mix versus supplier price increases and excise-tax changes, given the decline in gross margin percentage.
- Facility availability and covenant headroom as collateral balances fluctuate, along with the April 2014 maturity and renewal terms.
- The economics and funding needs of the two planned store openings and any acquisitions, as well as the effect of share repurchases and preferred-stock conversion on common-share dilution.