AMCON Distributing Company — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2013; fiscal year ends September 30. Results are unaudited. AMCON distributes consumer products to approximately 5,000 retail outlets and operates 16 natural-food stores. Sales include substantial cigarette and tobacco excise taxes.
Financial performance
| Metric | Three months ended June 30, 2013 | Year-over-year change | Nine months ended June 30, 2013 | Year-over-year change |
|---|---|---|---|---|
| Sales | $316.0 million | +2.9% | $892.8 million | +3.0% |
| Gross profit | $19.8 million | −0.5% | $57.3 million | −0.7% |
| Gross margin | 6.3% | 6.5% prior year | 6.4% | 6.7% prior year |
| Operating income | $3.1 million | −10.1% | $8.2 million | −7.7% |
| Net income | $1.6 million | −11.6% | $4.3 million | −9.3% |
| Diluted EPS | $2.19 | $2.37 prior year | $5.73 | $6.06 prior year |
For the quarter, wholesale sales rose 3.1% but wholesale gross profit fell 0.7%; retail sales declined 1.8%. For the nine months, wholesale sales rose 3.2% while segment gross profit fell 1.1%; retail sales fell 1.0%, while retail gross profit increased 0.6%. Wholesale sales growth reflected manufacturer price increases, higher state excise taxes, and other-product sales, partly offset by lower cigarette carton volume and mix. Consolidated operating expenses increased 1.6% for the quarter and 0.5% year to date, mainly due to costs of new health-food stores.
Cash flow, balance sheet, and debt
- Operating activities used $8.3 million in the first nine months, versus $6.7 million used in the prior-year period. Working-capital uses included higher inventory ($9.8 million), receivables ($2.9 million), and prepaid assets ($1.6 million).
- Investing activities used $1.7 million, primarily for capital expenditures of $1.8 million. Financing activities provided $9.7 million, including $13.7 million in net credit-facility borrowings.
- Cash was $0.18 million at June 30, down from $0.49 million at September 30, 2012. Working capital was $65.7 million, up from $49.9 million.
- At June 30, the company had $28.1 million outstanding on its revolving facility and $41.5 million available under the borrowing base. The facility’s credit limit was $69.6 million; average borrowing rate was 2.47%. Long-term debt was $5.4 million, including current maturities. Total debt, including the facility, was approximately $33.4 million.
- On July 16, 2013, AMCON renewed the Bank of America facility through July 2018. The $70 million revolving limit, $25 million accordion, and collateral package remain; inventory-purchase advances increased from $5 million to $10 million. The new agreement has no prepayment penalty, LIBOR pricing of 125–175 basis points depending on utilization, and a 1.0 fixed-charge coverage covenant if availability falls below 10%.
Outlook, risks, and notable items
Management provided no quantified earnings or revenue guidance. It said the wholesale market remains highly competitive with margin pressure, while cigarette and tobacco taxes and regulation may weigh on long-term demand. AMCON views its customer-service and merchandising offerings as a competitive differentiator. Retail competition from expanding regional and national chains is pressuring existing-store sales and industry margins; two new Akin’s stores opened during the quarter.
Key risks include tobacco taxes and FDA regulation, cigarette demand, supplier price changes, competition, inventory and customer-credit exposure, access to capital, fuel and commodity costs, and weather or other disruptions. The company does not hedge interest-rate or fuel-price exposure. Management said liquidity should be adequate, but a sharp deterioration in operating conditions could affect revenue, collections, or access to credit. Cash flow is affected by seasonal inventory needs and periodic inventory purchases. The filing reports no off-balance-sheet arrangements, no material changes to previously disclosed risk factors, and no legal proceedings. Disclosure controls were assessed as effective; no material control changes were reported.
Important facts for investors to verify
- Whether gross-margin compression and lower cigarette volume and mix persist despite sales growth.
- Whether new Akin’s locations can offset competition-related declines at existing stores and cover opening costs.
- Inventory, receivables, and seasonal working-capital trends, given negative operating cash flow and increased facility borrowings.
- Availability under the renewed credit facility as collateral levels fluctuate, along with covenant headroom and borrowing costs.
- The effect of tobacco regulation, excise taxes, supplier pricing, and demand trends on future sales and profitability.
- Share repurchases and Series B preferred-stock conversions: the company repurchased common and preferred shares during the period, and Series B shares outstanding declined from 58,000 to 16,000.