AMCON Distributing Company — Q3 2021 Form 10-Q
Business context and period: AMCON distributes consumer products through its wholesale segment and operates 20 natural and health food stores through its retail segment. This unaudited report covers the fiscal quarter and nine months ended June 30, 2021; the fiscal year ends September 30. Sales include excise taxes and are reported net of retailer incentives.
Financial results and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Sales | $438.3 million, up 10.4% year over year | $1,221.6 million, up 11.6% |
| Gross profit | $25.5 million, up 18.0%; gross margin 5.8% vs. 5.5% | $72.0 million, up 13.9%; gross margin 5.9% vs. 5.8% |
| Operating income | $4.3 million, up 73.9% | $11.6 million, up 129.8% |
| Net income | $3.7 million, up 133.7%; diluted EPS $6.48 vs. $2.77 | $9.2 million, up 236.8%; diluted EPS $16.37 vs. $4.79 |
| Operating cash flow | Not separately presented for the quarter | $12.7 million vs. $18.1 million |
- Q3 interest expense declined 28.5% to $0.3 million; nine-month interest expense declined 23.0% to $1.0 million.
- Cash was $0.7 million at June 30. Current assets were $138.6 million and current liabilities $46.4 million.
- Revolving credit facility borrowings were $51.5 million; reported facility availability was $58.0 million against a collateral-based limit of $109.5 million. Average facility rate at quarter-end was 1.96%.
- Long-term debt, including current maturities, was $5.8 million, versus $3.1 million at September 30, 2020. Facility borrowings plus long-term debt totaled approximately $57.2 million; operating lease liabilities are additional.
- Shareholders’ equity was $71.4 million, up from $64.8 million at September 30, 2020. The company paid $3.2 million in dividends during the nine-month period, or $5.54 per share.
Material changes and management commentary
- Wholesale drove most of the growth. Q3 wholesale sales rose 10.7% and gross profit rose 20.5%; nine-month sales rose 11.9% and gross profit rose 14.6%. Retail sales rose 1.8% in Q3 and 1.6% year to date, with improved gross profit and margins in both periods.
- Management attributed wholesale sales growth to cigarette manufacturer price increases and higher volumes in tobacco, confectionery, foodservice and other products. Higher sales volumes and promotions in other products were key gross-profit drivers. Retail results benefited from improved store operating efficiency, partly offset by closures of underperforming stores.
- Operating expenses increased $2.1 million in Q3 and $2.3 million year to date. Management cited higher employee compensation and benefits, insurance and fuel costs, partly offset by lower retail expenses following store closures.
- Equity-method earnings from Team Sledd, in which AMCON held approximately 49%, were $0.8 million in Q3 and $1.4 million year to date, compared with $0.1 million for the prior-year quarter and nine-month period. AMCON also held a $3.5 million secured loan to Team Sledd.
- Cash from operations decreased year over year despite higher earnings, reflecting working-capital movements, including increased receivables and prepaid assets. Cash used in investing improved to $1.2 million from $12.9 million, as the prior-year period included the Team Sledd investment and loan funding.
Outlook, risks and other items
- The filing provides no numerical earnings or revenue guidance. Management cautions that interim results may not indicate full-year results and says it believes liquidity will be adequate to sustain operations.
- COVID-related supply-chain disruption and product availability, workforce shortages, wage pressure and product inflation could adversely affect costs, operations and results. Management also identifies risks involving customer credit and collections, supplier and product availability, tobacco demand and regulation, competition, online retail, and the retail repositioning strategy.
- The facility matures in March 2025 and is secured by receivables, inventory, equipment and intangibles. Its fixed-charge-coverage covenant requires a ratio of at least 1.0 if excess availability falls below 10% of the maximum loan limit; management reported the trailing-twelve-month ratio was above 1.0. The filing reports no cross-defaults at June 30.
- A $0.5 million letter of credit supports the workers’ compensation program. The company reported no off-balance-sheet arrangements, no legal proceedings, and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective; no material internal-control changes were reported for the quarter.
Important facts for investors to verify
- Whether strong sales and profit growth persist, particularly as price increases, product mix and elevated consumer demand change.
- Whether labor, fuel, insurance and supply-chain pressures continue to raise operating costs or constrain product availability and order fulfillment.
- How lower operating cash flow and working-capital needs affect borrowing, facility availability and compliance with credit-facility conditions.
- The sustainability and timing of Team Sledd earnings, distributions and potential equity redemptions, and the collectability of the related secured loan.
- The reported $5.54 per-share year-to-date dividend and applicable credit-facility limits and conditions on future dividends.