AMCON Distributing Company — Q1 FY2012 10-Q
Reporting period: Three months ended December 31, 2011; comparative period is the three months ended December 31, 2010. AMCON distributes consumer products wholesale and operates 14 natural-food retail stores. The filing is unaudited; management cautions that interim results may not indicate full-year performance.
Financial results
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $283.6 million | $245.0 million | +15.8% |
| Gross profit / margin | $18.6 million / 6.6% | $17.6 million / 7.2% | Profit +5.8%; margin down |
| Operating income | $2.7 million | $3.4 million | -21.9% |
| Net income | $1.4 million | $1.8 million | -21.5% |
| Net income available to common shareholders | $1.37 million | $1.76 million | — |
| EPS, basic / diluted | $2.21 / $1.83 | $3.04 / $2.41 | Both declined |
| Operating cash flow | $(7.5) million | $2.2 million | — |
| Cash at period end | $1.0 million | $0.3 million | — |
Segments and material changes
- Wholesale: Sales rose 16.6% to $275.0 million; gross profit increased 9.8% to $15.1 million, while gross margin declined to 5.5% from 5.8%. The May 2011 L.P. Shanks acquisition contributed approximately $46.3 million of sales and $2.4 million of gross profit, but also $2.3 million of operating expenses. Cigarette price increases added sales, partly offset by lower cigarette volume and mix.
- Retail: Sales fell 6.1% to $8.5 million and gross profit fell 8.2% to $3.6 million. Management attributed weakness mainly to increased competition at Akin’s Midwest stores; Florida stores improved.
- Consolidated sales growth exceeded gross-profit growth, while operating expenses rose 12.5% to $16.0 million. Management cited acquisition-related costs, higher bad-debt expense and fuel expense, partly offset by lower compensation and other costs.
Liquidity, debt and outlook
- Operating cash use principally reflected a $9.5 million inventory build and reductions in payables, accrued liabilities and income taxes. Investing cash use was $0.3 million; financing provided $7.3 million, including $8.0 million of net credit-facility borrowings.
- Working capital was $58.8 million at December 31, versus $49.0 million at September 30, 2011. The balance sheet showed $28.8 million outstanding on the credit facility and $7.2 million in long-term debt, including current maturities.
- The facility has a $70 million revolving limit, subject to collateral-based borrowing limits. At quarter-end, the applicable limit was $63.4 million, with $28.8 million drawn and $34.6 million available. Average facility borrowings during the quarter were $38.8 million; peak borrowings were $50.7 million. The average facility rate was 2.79% at quarter-end.
- Management stated that liquidity should be adequate to sustain operations, while noting that market deterioration could affect sales, collections and access to bank credit. No quantified earnings or revenue guidance was provided. Management saw potential for organic growth and acquisitions amid industry consolidation.
Risks, contingencies and other items
- Risks cited include tobacco excise-tax increases and regulation, manufacturer price changes, cigarette and tobacco demand, customer credit risk, inventory costs, fuel and commodity prices, competition, consolidation, acquisition integration and access to capital. The company does not hedge interest-rate or fuel-cost exposure.
- No legal proceedings, material risk-factor changes or off-balance-sheet arrangements were reported. A $0.4 million letter of credit supports the workers’ compensation program; no credit-facility cross-defaults existed at quarter-end.
- Common and preferred dividends totaled approximately $0.2 million. Equity-based compensation expense was $0.3 million; 15,900 restricted stock units and 6,000 options were granted during the quarter.
- Management reported disclosure controls as effective, but the filing identifies the evaluation date as June 30, 2011. Investors may wish to confirm this date in the filed report.
Key facts for investors to verify
- Whether the acquisition-driven sales gains can offset weaker cigarette volumes, margin compression and higher operating costs.
- Inventory levels, seasonal working-capital needs and the effect of collateral-based borrowing limits on facility availability.
- Retail performance, particularly Akin’s response to national-chain competition.
- Potential effects of tobacco regulation, excise taxes, customer credit quality and unhedged fuel and interest-rate exposure.
- The disclosure-controls evaluation date and the terms and potential dilution from outstanding equity awards and convertible preferred stock.