AMCON Distributing Company — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2012; comparisons are with the three and nine months ended June 30, 2011. AMCON distributes consumer products through its wholesale segment and operates 14 natural-food stores through its retail segment. Dollar amounts are U.S. dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $307.1 million | $263.8 million | $866.5 million | $725.4 million |
| Gross profit | $19.9 million | $18.2 million | $57.8 million | $52.2 million |
| Gross margin | 6.5% | 6.9% | 6.7% | 7.2% |
| Operating income | $3.5 million | $3.9 million | $8.9 million | $10.3 million |
| Net income | $1.85 million | $1.83 million | $4.75 million | $5.24 million |
| Diluted EPS available to common shareholders | $2.37 | $2.36 | $6.06 | $6.81 |
Q3 sales included $96.1 million of excise taxes in 2012 and $85.9 million in 2011; nine-month sales included $272.7 million and $238.1 million, respectively. Sales are reported net of retailer incentives.
- Segment results: Q3 wholesale sales grew 17.0% to $297.6 million, while retail sales were essentially flat at $9.5 million. Wholesale gross margin declined to 5.3% from 5.6%; retail gross margin improved to 42.9% from 42.5%. For nine months, wholesale sales rose 20.3% to $838.3 million, and retail sales declined 1.2% to $28.2 million.
- Cash flow: Operating activities used $6.7 million in the first nine months, versus $11.5 million used in the prior-year period. Investing activities used $0.9 million; financing activities provided $6.8 million, including $9.3 million of net credit-facility borrowings. Cash declined by $0.8 million to $0.6 million.
- Liquidity: Working capital was $63.6 million at June 30, 2012, compared with $49.0 million at September 30, 2011. Current assets were $90.7 million and current liabilities $27.2 million. Inventories increased to $49.4 million from $38.4 million.
- Debt: The revolving credit facility balance was $30.1 million, with $39.5 million available under the borrowing base and facility limits. The facility’s stated revolving limit was $70 million and its maturity was April 2014. Long-term debt was $6.6 million, including current maturities. The facility’s average interest rate at June 30 was 2.43%.
Material changes and management commentary
- Revenue growth was largely driven by the May 2011 acquisition of L.P. Shanks Company (LPS), cigarette manufacturer price increases and higher sales in other wholesale product categories. Management attributed $29.3 million of Q3 wholesale sales growth and $120.0 million of nine-month growth to LPS.
- Despite higher sales and gross profit, operating income fell 10.6% for Q3 and 13.7% for the nine-month period. Management cited acquisition-related operating costs, higher compensation and other expenses; nine-month operating expenses also included higher bad-debt expense and fuel costs. Gross-margin percentages declined in both comparison periods.
- Management said convenience-store industry consolidation, intense competition, product-tax and regulatory initiatives could pressure wholesale margins. It noted improving sales at Florida’s Chamberlin’s stores and increased competition affecting Akin’s Midwest stores.
- Management believed liquidity was adequate to sustain operations but cautioned that deteriorating market conditions could affect revenue, customer collections and access to bank credit. The company did not hedge interest-rate or fuel-cost exposure.
Guidance, contingencies and other notable items
- The filing provides no specific earnings or revenue guidance. Management’s comments are forward-looking and subject to risks including tobacco regulation and taxes, competition, acquisition integration, commodity and fuel prices, customer credit risk, and access to capital.
- On July 17, 2012, after quarter-end, AMCON refinanced approximately $4.8 million of real-estate notes into a note bearing fixed interest of 2.99%, with payments through June 2017 and the remainder due in July 2017.
- AMCON repurchased 17,000 shares for $918,000, or $54 per share, during the nine months. It reported no off-balance-sheet arrangements, no legal proceedings, and no material changes to previously disclosed risk factors. Disclosure controls were judged effective as of June 30, 2012.
Important facts for investors to verify
- How much future revenue and earnings growth depends on the acquired LPS business, and whether its integration and servicing costs continue to weigh on margins.
- Whether wholesale gross-margin pressure persists amid customer consolidation, tobacco-related taxes and regulation, and competitive pricing.
- Whether inventory growth and working-capital needs reverse as management expects, and how they affect operating cash flow and borrowing availability.
- Current credit-facility availability, covenant headroom and debt terms, including the subsequent real-estate refinancing.
- The effect of competition on Akin’s stores and the sustainability of the reported improvement at Chamberlin’s.