AMCON Distributing Company — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended June 30, 2023; fiscal year ends September 30. The company operates wholesale distribution and retail health-food businesses. Its wholesale segment serves approximately 6,800 outlets; its retail segment operates 17 stores.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $696.5 million | $550.6 million | $1,847.5 million | $1,365.0 million |
| Gross profit / margin | $46.9 million / 6.7% | $33.7 million / 6.1% | $123.0 million / 6.7% | $87.3 million / 6.4% |
| Operating income | $7.9 million | $6.9 million | $18.8 million | $14.6 million |
| Net income available to common shareholders | $3.9 million | $6.0 million | $8.6 million | $12.1 million |
| Diluted EPS | $6.59 | $10.38 | $14.56 | $20.72 |
Sales include excise taxes of $153.7 million in Q3 2023 and $414.9 million for the nine-month period. Sales are reported net of retailer incentives. Higher sales and gross profit did not translate into higher net income, principally as interest expense increased to $2.4 million in Q3 from $0.7 million and to $6.2 million for nine months from $1.2 million. The prior-year comparisons also included equity-method investment earnings and a non-cash gain related to Team Sledd consolidation.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $9.5 million, versus $7.1 million in the prior-year period. Working-capital outflows included $12.3 million for inventory and $8.0 million for receivables.
- Investing cash outflow was $61.5 million, including $54.9 million for the Henry’s acquisition. Cash capital spending was $6.8 million, compared with $13.9 million in the prior-year period.
- Cash at June 30 was $0.7 million. Total assets were $368.7 million, compared with $289.1 million at September 30, 2022. Inventory was $162.6 million and accounts receivable was $78.6 million.
- Credit-facility borrowings were $143.4 million, up from $91.3 million at September 2022; long-term debt, including current maturities, was $15.0 million. The facilities’ collateral-based credit limit was $249.9 million, with $106.5 million available. The stated combined facility commitment capacity was $300 million.
- The average facility interest rate was 6.75% at quarter-end. The company reported compliance with financial covenants and no cross-defaults. Facilities are secured by substantially all relevant equipment, intangibles, inventory and receivables, plus certain real estate; they include springing financial covenants.
- Nine-month financing cash flow was $52.3 million, largely reflecting net revolving-credit borrowing. The company paid $3.4 million in dividends during the period.
Changes, outlook and risks
- Henry’s acquisition closed February 3, 2023, for approximately $54.9 million in cash, funded with bank borrowings. Henry’s contributed $131.6 million of revenue and $1.3 million of net income from acquisition through June. Purchase accounting remains provisional and may change materially during the measurement period.
- Wholesale Q3 sales rose 27.2%; the company attributed growth to Henry’s, Team Sledd, manufacturer price increases and stronger sales in other product categories, partly offset by lower cigarette carton volume and mix. Wholesale gross margin increased to 6.3% from 5.5%.
- Retail Q3 sales fell 5.3%, and retail gross margin declined to 35.1% from 37.3%. The filing cites hurricane-related closure of the Port Charlotte store, two store closures and lower realized margins. The company said its repositioning strategy remains a risk.
- Management cited supply-chain disruption, inflation and higher product, labor, fuel and interest costs, alongside pressure on consumer demand. It is monitoring potential FDA restrictions or bans affecting cigarettes, tobacco and vaping products, including menthol; implementation could adversely affect results.
- The company does not hedge interest-rate or fuel-cost exposure. It cautioned that a sharp change in operating conditions could affect revenue, collections and access to bank credit, while stating it believes liquidity is adequate for the short and long term. No specific financial guidance was provided.
- Team Sledd’s ownership increased to approximately 64% from 56% following an April 2023 redemption of non-controlling interests. The remaining mandatorily redeemable interest is measured at fair value using Level 3 assumptions; fair-value changes are recorded in other expense.
- Management concluded disclosure controls were effective as of June 30. No legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Henry’s integration delivers expected operating benefits, and how final purchase accounting affects reported goodwill, intangible assets and earnings.
- How much sales growth reflects acquisitions and price increases versus underlying volume and mix, particularly for cigarettes and other wholesale categories.
- Whether operating cash generation can support elevated working-capital needs, acquisition-related debt and interest expense.
- Facility availability, borrowing-base changes, interest-rate exposure and covenant headroom, given low cash and secured revolving borrowings.
- Retail store performance and recovery at Port Charlotte, as well as potential tobacco regulation, inflation and supply-chain effects.