DIT

AMCON Distributing Co. - 10-Q Summary (Q2 FY2009)

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2009 (Q2 FY2009). AMCON Distributing Company operates two primary segments: wholesale distribution of consumer products (primarily cigarettes and tobacco) in the Great Plains and Rocky Mountain regions, and retail health food stores in Florida and the Midwest. The company is a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 2.6% ($5.0 million) for the quarter and 2.9% ($11.7 million) for the six months compared to the prior year. Wholesale sales rose 3.3% due to manufacturer price increases, partially offset by lower volume.
• Profitability: Operating income increased $1.2 million for the quarter. Gross profit improved by $1.5 million (9.6%) driven by a $2.6 million benefit from cigarette price increases.
• Discontinued Operations: The company recorded a loss of $0.1 million for the quarter related to Trinity Springs, Inc. (TSI), a water bottling facility. CPH exercised its option to acquire TSI assets in exchange for a $5.0 million note, a transaction expected to close in April 2009.
• Capital Structure: The company fully redeemed its Series C Convertible Preferred Stock ($2.0 million) in February 2009. Net payments on the credit facility reduced debt by $15.4 million during the six-month period.
• Inventory & Receivables: Both accounts receivable and inventory decreased significantly due to customers reducing purchases in anticipation of the SCHIP floor stocks tax.

Outlook, Risks, and Management Commentary

• SCHIP Legislation Impact: New federal excise taxes on cigarettes (increasing from $0.39 to $1.01 per pack) and a one-time floor stocks tax of approximately $1.7 million (due July 31, 2009) are expected to accelerate the decline in cigarette demand and increase inventory carrying costs.
• Economic Conditions: The retail health food segment faces a challenging environment due to the recession, resulting in lower transaction counts and basket sizes, particularly in Florida. Wholesale customers are facing credit constraints.
• Regulatory Risks: Potential FDA regulation of tobacco products could impose compliance costs and operational restrictions. The company is monitoring this legislation closely.
• Liquidity: Management believes liquidity is adequate to sustain operations. The company is in compliance with all debt covenants, including a minimum EBITDA requirement of $2.0 million for the six months ended March 31, 2009.
• Dividends: A cash dividend of $0.10 per common share was declared in January 2009.

Investor Verification Checklist

• SCHIP Tax Liability: Verify the timing and impact of the $1.7 million floor stocks tax payment due in July 2009 on cash flow.
• Volume Trends: Monitor whether the decline in cigarette carton volume persists beyond the temporary reduction caused by tax anticipation.
• Discontinued Operations: Confirm the closing of the TSI asset sale in April 2009 and the recognition of the $1.5 million deferred gain.
• Customer Credit Risk: Assess the adequacy of the allowance for doubtful accounts given the economic downturn affecting thinly capitalized convenience store customers.
• Debt Covenants: Ensure continued compliance with the debt service ratio and cumulative EBITDA covenants under the Bank of America credit facility.