Business Context and Reporting Period
Company: AMCON Distributing Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Fiscal Third Quarter ended June 27, 2003 (13 weeks) and the nine-month period ended June 27, 2003 (39 weeks).
Business Overview: AMCON operates three segments: wholesale distribution of consumer products (primarily cigarettes and tobacco), retail health food stores, and a beverage division (Hawaiian natural spring water and other beverages). The company is headquartered in Omaha, Nebraska.
Key Financial Metrics
| Metric | Q3 2003 (3 Months) | Q3 2002 (3 Months) | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Sales | $189.9 million | $218.7 million | $564.7 million | $623.0 million |
| Gross Profit | $16.0 million | $16.1 million | $43.7 million | $45.4 million |
| Gross Margin % | 8.4% | 7.3% | 7.7% | 7.3% |
| Operating Income | $1.8 million | $2.4 million | $3.2 million | $5.2 million |
| Net Income | $0.7 million | $0.8 million | $0.7 million | $1.3 million |
| Diluted EPS | $0.22 | $0.26 | $0.22 | $0.43 |
| Operating Cash Flow (9mo) | $13.2 million (2003) vs. $(3.8) million (2002) | |||
| Cash & Equivalents | $0.6 million (as of June 27, 2003) | |||
| Total Debt (Current + Long-term) | ~$50.4 million (as of June 27, 2003) | |||
| Working Capital | ~$23.0 million (as of June 27, 2003) |
Material Changes vs. Prior Period
- Sales Decline: Sales decreased 13.2% in Q3 and 9.4% for the nine months compared to the prior year. The decline was driven primarily by the wholesale distribution segment, specifically a 11.2% reduction in cigarette carton volume and price reductions on Philip Morris and Brown & Williamson brands.
- Margin Improvement: Despite lower sales, gross margin percentage improved (8.4% in Q3 vs. 7.3% prior year) due to a reduction in the LIFO reserve resulting from lower cigarette prices, which lowered the cost of sales.
- Profitability Drop: Net income fell 18% in Q3 and 48% for the nine-month period. Operating income declined due to lower sales volume and increased operating expenses in the beverage segment ($1.2 million increase in Q3) related to the new marketing and distribution business.
- Debt Reduction: The company significantly reduced debt, paying down approximately $9.9 million on revolving credit facilities. The debt-to-equity ratio improved from 3.69 to 2.95.
- Accounting Changes: The company adopted SFAS No. 142, ceasing the amortization of goodwill and tradenames, which positively impacted operating income compared to prior periods where amortization was recorded.
Outlook, Risks, and Management Commentary
- Segment Performance:
- Wholesale: Management notes a difficult environment for national brand cigarettes due to price increases and declining consumption. The company expects gross margins on private label cigarettes to decrease by up to $1.4 million in fiscal 2003 due to less favorable terms in a new manufacturing agreement with Philip Morris.
- Retail: The retail health food segment showed improvement in Midwest stores but continues to struggle in Florida due to lower tourist trade. Management expects continued improvement following operational realignments.
- Beverage: The beverage segment remains unprofitable but is expanding its customer base in Hawaii and Japan. A new marketing subsidiary (TBG) was formed to distribute other beverages.
- Liquidity: The company maintains a $55.0 million revolving credit facility with $26.8 million available. Management believes cash from operations and available credit are sufficient to meet future obligations.
- Risks:
- Heavy dependence on cigarette sales (71% of revenue).
- Declining national cigarette consumption and retailer discontinuation of cigarette sales.
- Competitive pricing pressures and unfavorable terms in private label agreements.
- Interest rate risk on variable rate debt (mitigated by $15.0 million in interest rate swaps).
- Capital Expenditures: Approximately $1.0 million is committed for warehouse expansion and equipment for the Hawaii water bottling operation, expected to be completed in Q4 2003.
Investor Verification Checklist
- Cigarette Volume Trends: Verify the 11.2% decline in carton volume and the sustainability of the company's customer base in the face of declining national consumption.
- Private Label Margins: Confirm the impact of the new Philip Morris agreement on future gross margins, specifically the projected $1.4 million decrease.
- Beverage Segment Viability: Assess the timeline for the beverage segment to reach profitability given the continued losses and capital expenditures for expansion.
- Debt Covenants: Review compliance with the 1.0 debt service coverage ratio and 93% fill rate requirements under the revolving credit facility.
- LIFO Reserve Impact: Understand the volatility of the LIFO reserve and its effect on reported gross margins if cigarette prices stabilize or increase.